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The fact that after over 30
years of consistent mismanagement and decline, there is still any discussion
on whether or not we should allow the now significantly smaller “Big
Three” automakers to fail is clear evidence that Washington
has lost all common sense.
Why, when after more than three decades of continuous restructuring, GM,
Ford, and Chrysler have not been able to change their culture, high-cost
basis and ill-conceived strategies, does anyone believe yet another break
would change anything? Are they going to be better off next year, or the year
after that, or even five years from now? Just because their situation has
become even more precarious, it doesn’t mean that they will be more
successful going forward… more likely the opposite.
"The definition of stupidity is doing the same thing over and over again
and expecting different results," said Albert Einstein.
The best thing that could happen to the auto industry is the Big Three filing
for bankruptcy protection. As a former turnaround professional, I am
convinced that the tools afforded by the bankruptcy courts would allow these
companies to restructure dramatically, thus allowing them to renegotiate and
drastically lower most of their liabilities. Management would be overhauled,
pensions renegotiated, union agreements tabled and made more flexible. Everything
that these three companies have attempted to do for years, and could never
achieve, would now be possible.
So, why in the world is management siding with the unions in their appeal to
Congress?
Because under bankruptcy protection, management becomes accountable to the
court, many of their perks and benefits would be curtailed, and they could,
heaven forbid, even lose their jobs.
The auto industry, its unions and allies are therefore quick to point out
that they, too, are “too big to fail” (have we heard that
before?), that the American economy would not recover from the job losses and
the economic impact of failures that would have far-reaching implications.
The Center for Automotive Research (CAR) has just released a comprehensive
study on the impact of a 100% failure of the Big Three in the U.S.:
- In the first year, the U.S.
economy would lose 3 million jobs (about nine additional jobs for each
auto worker that is laid off). It would lose another 2.5 million in year
two and 1.8 million in year three.
U.S.
personal income would decline by over $150 billion in the first year and
another $250 billion in the next two years.
Our government
would also lose $60 billion in 2009 and almost another $100 billion in
the next two years.
I agree – it poses a very grim scenario.
In fact, Senate Bill Sec. 402 seeks to “(C) preserve and promote the
jobs of 355,000 workers in the United States directly employed by the auto
industry and an additional 4,500,000 workers in the United States employed in
related industries; and (D) safeguards the ability of the domestic automobile
industry to provide retirement health care benefits for 1,000,000 retirees and
their spouses and dependents.”
Obviously, the $25 billion approved by Congress on September 24, 2008 is
already falling short. It is clearly not enough to deal with a problem of
that scale and, the car makers lament, needs to be doubled immediately. But in
case you wonder, the industry and its unions do reserve the right to come
back for more…
So let’s review some of CAR’s assertions in light of what we
know:
Auto sales are forecast to decline from 16.1 million in 2007 to 14.9 million
in 2008. 2009 can be
expected to be much worse. Spending on capital goods such as cars and trucks
will be affected long-term as a result of excessive consumer debt, tighter
credit terms, higher unemployment, and a serious recession (or depression).
If car sales decline dramatically, manufacturing capacity has to be reduced
to match demand. This means that the less productive plants would be shut
down, employees laid off, and that the supply chain would have to adjust
accordingly. This is basic economics so far.
Now comes our choice: On the one hand, we have some highly productive global
manufacturers that produce fuel-efficient vehicles the U.S. consumer wants
and can afford to buy. On the other hand, we have three inefficient companies
that produce unattractive gas guzzlers and are plagued with high legacy costs
and liabilities (Big Three workers make $73/hr, Toyota’s $48, the
average manufacturing worker makes $32). Why should U.S. taxpayers subsidize
these losers? Is it so that they can continue to compete unsuccessfully with
productive manufacturers and avoid any dramatic (and much-needed) changes in
their way of doing business?
In light of the fact that throwing good money after bad almost never works
out, I think the U.S. taxpayers should not bail out GM, Ford, and Chrysler. A
common-sense alternative would be to save our tax dollars and allow the most
efficient manufacturers to gain market share and hire more workers.
Ultimately the U.S. market will post sales of 12 to 15 million cars annually.
If it takes one, two, or three million fewer workers to produce the cars U.S.
consumers can afford to buy, so be it.
A farmer with one modern wheat combine can do the job of a thousand 18th
century farm hands. That is a lot of unemployed farm workers, yet nobody
demands to return to those good old days. Productivity and efficiency do
result in job losses and dislocation, but eventually progress creates new
jobs and additional wealth.
Whether a Honda, GM, Toyota, Ford, Hyundai, or VW, currently each and every
car still requires one engine and four wheels. Each manufacturer uses
basically the same domestic and overseas suppliers, and each has dealers
selling its cars (most dealers represent a broad spectrum of brands and will
sell whatever car the market wants). The argument that GM closing its doors
would result in the loss of 2 million jobs or more is ludicrous as the
competitors that pick up the slack will hire workers and buy more from their
suppliers. While that may not be good for Detroit, it may be good for the
Carolinas or Tennessee.
Simply, business shifting from certain players in the industry to others is
called competition. Capitalism and competition are the forces that have made
the U.S. the most successful economy for many decades. Granted, it is a harsh
reality, but it works, and so far no other system has come even close to
creating as much wealth for most of its agents.
Anyone who follows our flagship newsletter, The Casey Report, knows our stance: we hope, most likely in
vain, that the new administration will finally come to the realization that
no entity is too big to fail. Besides, bankruptcy reorganizations have a much
greater chance of success with larger corporations, as they usually have lots
of assets to dispose of -- assets that can be sold cheaply to new
enterprises, which are then able to build businesses on a much sounder basis.
In the process, there is innovation and progress.
The choice is clear: Either the Obama administration can continue on the path
of nationalizing entire segments of our economy (so far banking, insurance,
auto – next, health, airlines…) and run them into the ground. Or
it can let poorly managed companies fail, thereby making it easy for successful
businesses and new entrepreneurs to buy the assets of these organizations.
Step back and let the markets work their magic instead of blaming the market
for ills that were created by special interests and poorly designed
regulations.
***
Olivier Garret
Caseyresearch.com
Olivier Garret is CEO of Casey Research, LLC., one
of the nation’s oldest and most respected organizations dedicated to
providing independent investors with unbiased research on opportunities to
earn extraordinary profits by being just ahead of the crowd.
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