Now it would seem, like AIG, the US will take stakes in the Big Three, effectively buying into the companies and restricting their use of the money and ultimately limiting their ability to be competitive in a rapidly changing auto marketplace.  More enjoyable still is that many think a “car czar” will be required to “oversee” the Big Three and their use of the money.  Kenneth Feinberg’s name is being thrown around for this position, but besides being a lawyer and having some experience with the 9/11 victim’s compensation fund it doesn’t seem to me that he knows his head from a hole in the ground when it comes to cars.  What makes peope think that just because someone works for the government or is appointed to a role that they can accomplish that role without training, experience, and inside knowledge that would allow them to determine good from bad?

Sure, from the outside, with our 20-20 vision for what has happened in the past, it’s easy to see that all of the Big Three have made mistakes and bad decisions.  They’ve been wasteful, possibly short-sighted, and maybe even a little top-heavy (sounds like our government at times, doesn’t it?), but I believe that it’s going to take those same people to at least point us in the direction of what is to come.  Anything less than that and you’ve got someone guessing at what makes sense and what doesn’t.  GM management seems to know this, and I suspect that Chrysler and Ford have a good inkling, too.

“To blame the American automobile executives for this frankly is ridiculous,” GM Vice Chairman Mr. Lutz said, suggesting an unforseen downturn in the economy and housing market are the culprits. “How were we supposed to forecast this when the government doesn’t forecast it and the financial institutions couldn’t?”

On the good side (said with sarcasm), though, considering there are so many things for them to worry about, everyone seems to be in agreement that all auto-manufacturers should get rid of their private planes.  They media has focused on this, while forgetting how painful flying commercial for a senior management team can be.  Heck, I bet they write in the agreement that they even have to fly commercial and forfeit their frequent flier miles, too.

Ranter

In normal times, this might not be such a big deal.  Chrysler went into bankruptcy a few decades ago and emerged as a better, stronger company.  But, times have changed, and the underlying problem is the same no matter what industry we’re talking about – lenders are remiss to help companies before they get into trouble and even less likely to help those in bankruptcy.  Congress seems to be missing these facts as they continue to grill the Big Three, and while I’m not in support of a bailout, it is time to consider a loan or rescue package that will allow these companies to survive.

Interestingly enough, CNN recently polled 1100 people by telephone only to find that 61% of them oppose a bailout of the auto indusustry.  Their conjecture is that the American consumer is burnt from the Troubled Asset Relief Program and its enormous size, leaving them feeling as though $35 billion just isn’t enough to worry about.  Unfortunately, my belief is that much of the problem Detroit is experiencing today stems from the same set of problems that is troubling Wall Street – lenders aren’t lending.  They’re not lending to each other, they’re not lending to other businesses, and most importantly for Detroit they’ve made it difficult to get loans for consumers wanting to buy new cars.  Add to that the market turmoil, the media’s continued blaring horns claiming how bad the economy is, and increasing layoffs and you’ve got the “perfect storm” for taking out a Big Three player.

Apparently I’m not the only one considering the devastation that this would cause world-wide, and Keith Wendell of Johnson Controls recently pointed out the obvious:

“Should one of the Detroit 3 fail, a significant number of supplier failures would occur and become unmanageable,” he said. These companies also supply parts to foreign automakers that assemble cars in the United States.

From an economist:

Economist Zandi urged Congress to provide the $34 billion. “Without any government help, the Big Three will quickly end up in bankruptcy and be effectively liquidated, resulting in hundreds of thousands of layoffs at just the wrong time for the sliding economy,” he said.

With recent actions it would also seem that the Big Three are willing to do whatever it takes to open their books and even as far as government oversight to save their companies.  Even though they haven’t been the smartest about their efforts, their persistence and similarity of message seems telling to me.  Couple that with a roughly 30% drop in sales compared to a year ago, it’s looking very bleak for these companies.  The only one that seems to be somewhat safe, if you believe Alan Mulally, president and CEO of Ford, is Ford, and even he is going to Washington to secure loans in case of a more serious downturn.

Only time will tell where this ends up, but for the sake of our economy, the jobs of people surrounding the auto industry, and the future of manufacturing in America I hope that the people reviewing these decisions know what they’re doing.  If they don’t, the world will suffer.

Ranter

The Big Three Are Looking for $25 Billion Plus to Help Weather a Longer Than Expected Recession

I talked yesterday about my feelings surrounding the auto-bailout for Chrysler, Ford and General Motors, and the more I read about what Congress is doing and the debates that are flying around the more frustrated I get.  Now CNN is reporting that Congress wants the automakers to show how they plan on spending their bailout dollars before they’re willing to offer any.  Generally speaking this isn’t a bad idea, but what I find most frustrating is that they haven’t publicly asked the same from companies like AIG or banks taking money from the already approved $700 billion bailout.  Doesn’t it seem logical that any company coming to Uncle Sam for a loan/bailout would be held to the same standards?

At the same time they’re asking for $25 billion in taxpayer money – these auto company CEOs are idiots.  They all came from the same state in their own private luxury jets.  The average American will never see first class, let alone the inside of a private luxury jet, and while continuing to pay their taxes will probably end up eating Mac-and-Cheese to get through this depression recession and these beggars can’t even share a ride or fly commercial.  That’s saying two things – they are neither green nor frugal, and that should be disconcerting to everyone.  These companies need to get both quickly and those changes need to start at the top.

I’ve voiced my opinions about what needs to be done for the economy, and now I would like to talk about what needs to be done for the auto-industry to succeed.  My experience is limited, my economic knowledge is nill, but I am a consumer and do understand that there are obvious changes that should be visisble to anyone with half an interest in fixing these problems.

• Become Competitive With Toyota and Honda. The Big 3 have lost their edge.  Americans have lost their faith in these companies and it’s not going to get better for them overnight.  With few exceptions, the American auto industry has lost its vision, quality, and competitiveness in today’s market.  Their cars are dated, of lower quality, and often priced higher than the foreign competitors.  Until they realize that the competition isn’t amongst each other they will never reach a level of success that can sustain the industry.
• Reduce Costs and Long-Term Obligations. A huge problem with the Big Three right now is simple – the Unions.  They’ve done an outstanding job of increasing the costs of their members through collective bargaining, but in times like this they’re a roadblock to solving the big problems that face all three manufacturers.  In order to survive these companies are going to have to reduce their medical expenses, reduce their pension costs, and reduce their labor costs.  If the Union isn’t going to work with them to make these changes it’s going to be a nearly impossible battle for these companies.
• Reduce Their Corporate Perks and Salaries. Being the president of Ford can be a very, very rewarding job.  But the payroll numbers are only half the story, and looking back to the Lee Iacoca days of Chrysler it’s obvious that the private lunchrooms, limousines in waiting and private air travel are going to have to be cut.  The extravagant car shows, announcements and excessive advertising will have to be dropped, too.  Salaries for all levels will have to be adjusted to help these companies survived and the people at the top will need to accept that for a while it’s going to be very, very lean.
• Improve the Car Buying Experience. If you asked most Americans if they would prefer to buy a new car or go to the dentist and I would be willing to bet that a very high percentage would prefer to visit the dentist to have their teeth pulled without Novocaine.  Buying a car has become that bad of an experience – especially for domestic brands.  GM did a good thing with Saturn – their one-price structure – and it worked very well.  Why they wouldn’t bring that out company-wide, I still don’t understand.  Using Scion as an example – everything is spelled out for you.  From the cost of each service to the cost of every accessory.  You don’t need to negotiate and you don’t need to worry about being taken advantage of.  This model works and it works well – generally the consumer will appreciate being treated like an adult and the margins for the dealers, while not huge, will not vary, which means that they can consistently budget for their business.

These are obviously a non-auto-executives ideas.  I don’t know anything about the car business, but I do know what it takes to succeed in business and these guys aren’t doing it.  They need help and they need to take their thousands of employees and become lean and mean to become competitive again.  For now, I am simply saying loan them the money and give them a chance to deal with lean times.  If they then fail, at least it’s not for lack of trying.

Ranter

The problem that I have with the proposed auto-bailout is that it’s starting to look like the prejudices are coming out.  Most vocal are the same people that supported the recent $700 billion bailout.  These rich folks in office want to protect the companies and individuals that have backed them the most and aren’t worrying as much about the average American.  Most government officials have forgotten who votes in this country, and unfortunately when it comes time to vote again most will have long forgotten about the decisions made today.  Think about it – until recently most of the country has never heard of a company named AIG.  Yet, the government had us all convinced that if they went under hundreds of thousands would be impacted.  To this point already, AIG has been “loaned” over $150 billion and it’s still questionable if they’ll survive.  That billion with a “b” and taxpayer money.

On the other hand, I think you would be hard pressed to find a person in the United States over the age of six who hasn’t heard of General Motors.  Most over 10 probably know how successful they used to be and their impact on America.  Right now their industry needs a lousy $25 billion and they’re getting denial every step of the way.  Senator Christoper Dodd, (D) from connecticut, who also happens to be the Chairman of the Senate Banking, Housing, and Urban Affairs Committee is quoted as saying:

“Their board rooms in my view have been devoid of vision. They have promoted and often driven the demand of inefficient, gas guzzling vehicles, and dismissed the threat of global warming.”

Anyone want to bet on whether the boardrooms of AIG and the banks benefiting from the bailout were any more visionary in their foresight on the mortgage crisis impacting the world today?  Sure seems like that would have been easier for everyone to see that coming then it would be to imagine those same companies bringing the economy to its knees leaving consumers unabe to afford to buy cars from GM, Ford and Chrysler.  Befitting his title, Senator Dodd goes onto justify the reason that banks need help by saying:

“I appreciate the Treasury Department’s willingness to adjust to the current situation in our financial markets.  I am also gratified that they listened to Congress when we insisted on including alternative strategies, such as liquidity injections, in the financial rescue legislation.  It is alarming to imagine how limited the Treasury’s options would be if Congress had not made substantial changes to their three page proposal.”

…, it is becoming increasingly apparent that a robust and aggressive program to stem the tide of foreclosures sweeping across the nation is critical to any policy to put our economy back on track.  I am concerned that we may have to wait until the next Administration before we have the real change in economic policy that our nation needs, but it is my sincere hope that Secretary Paulson collaborates with Chairman Bair to get this program up and running as soon as possible.  There is no legitimate reason why they would be unable to do so.  Secretary Paulson should be as quick to realize that the foreclosure issue is critical to solving our problems as he was in realizing that equity purchases were necessary.”

Any questions about where Dodd’s allegiances are?  I guess there’s not a ton of car money in Connecticut.  Unfortunately, at this point for the government it is probably all or nothing.  The government either needs to look at these companies and say they cannot be replaced or continue heading down the path of rescuing those that are most in need.  Obviously this isn’t trickle-down to even the smallest companies, but I think that GM, Ford and Chrysler would have to qualify and it’s amazing to me that the same government that rubber-stamped $700 billion can’t see it.

Ranter

Some of you still remember the internet bubble and subsequent popping of that bubble almost a decade ago.  My own company closed its doors after some of our “new economy” customers lost their funding, resulting in non-payment on millions of dollars already spent on web development.  We paid our employees and vendors the old fashioned way – we sold assets, clients, and took second jobs to make sure that we paid every dime owed.  Ultimately, we closed our doors, but not one vendor was left without payment or a guarantee of payment.  That’s how business used to be done.  It never once occurred to us to ask the government to bail us out of our problems, and I don’t remember any other company getting a bailout either.

In 2008, everything seems to have changed.  At what point is a company too big to fail?  Enron was huge, they failed, and the world continued to spin.  This year so far we’ve seen a $350 billion stimulus package, $130 billion going to AIG, $25 billion to the auto industry, $850 billion going to banks, financial institutions and who knows what else, and untold billions going out in backhand deals that most of us will never completely understand.  That’s a lot of money, and the way it looks today – we’re not even close to done bailing out big business with taxpayer’s hard earned money.

To be fair, these disbursements are really being sold as investments/loans and if you believe in a short-lived recession they could potentially be very, very lucrative.  Even in the case of a long-term recession, some of these deals could pay out quite well if the borrowing companies survive and prosper.  If not, these deals will prove to be enormous failures and American taxpayers will be left footing the bill.  If you’re a betting person, you’d have to play the odds and assume that some of these already failing companies will continue their path and ultimately fail in spite of the massive amount of money being put into them.  Even if you are not a betting person, you should be asking yourself, what makes the government feel that these companies can succeed now in what is being called an ever more difficult economy?

AIG was loaned almost $130 billon and recent articles have them saying that it’s pretty much gone and in order to continue their operations they may need more.  Who is asking the question – where did that first $130 billion go?  If your friend is borrowing money while quitting their job and buying new cars, at some point you stop loaning that friend money, regardless of the fact that he lets you borrow the cool cars every now and again.  At some point, it has to be the same thing for AIG – at some point the American economy has to cut AIG off and let the chips fall where they may.  A lot of people are going to lose a lot of money, and that’s unfortunate, but it’s better than the entire nation losing a lot of money so that some investors can sustain their riches.

Survival of the fittest, and ultimately some of these companies need to fail.  The strongest will survive and thrive.  Right now it’s like we’re slowly pulling the band-aid off, extending the pain, when we should really just rip it off quickly, take the pain, and move on.

A great example has to be the auto-industry.  Times are tight – no doubt – but if companies like GM, Ford and Chrysler need tens of billions just to survive, it’s time to ask out loud – can America continue to sustain three mediocre car companies?  It wasn’t too many years ago that Chrysler needed only $1.3 billion to survive (which resulted in $300 million in interest paid back the treasury), and now they’re back in line for another government loan – this one much larger than before.  Isn’t it time to ask, does America need Chrysler?  If they were as good at making cars as, say Toyota, wouldn’t they be profitable like Toyota?

These companies obviously provide millions of jobs – even conservative estimates are over 300 million people that would be impacted by the failure of one of the big three.  That’s a lot of people – but is it really?

Hypothetically, if Chrysler disappeared tomorrow, would 300 million people really lose their jobs?  Obviously not, because Americans will continue to need and buy cars.  Those would be Chrysler car buyers aren’t suddenly going to start riding their bikes – they’re going to buy another car.  Sure, it might be a Toyota or Nissan, which could be made in the US or anywhere around the world, but they are going to continue buying cars at the same volume that they might have bought Chrysler cars.  And, the companies that are capturing those sales might be more efficient, but they are still going to need some of the people, facilities, parts and mechanics that would have gone to Chrysler.  So yes, there would be a lot of pain, but in reality it’s not nearly as much as politicians and economists would leave you to believe.

It’s time to decide – do we keep handing out loans on a hope and a prayer that things will get better in the short-term and we won’t lose our shorts, or do we take our pain and move to the inevitible upswing that follows every loss?  I believe Darwin.

Ranter