On (Not) Bailing Out the Big Three

The Senate Republicans torpedoed whatever hope there was for the Big Three (why are they still called that even though they continue to shrink?) to receive a bailout from Congress.  Now the survival of GM and Chrysler apparently rests on the whims of the White House.

I hope Bush takes a stand and say no.  If there’s one industry that has shown itself to be most unworthy of a bailout, it’s the automobile industry.

Consider:  when I first moved to the United States, General Motors alone constituted half of the cars sold in the United States.  Today, Ford, GM, and Chrysler combined don’t even crack half.  Toyota, once the fourth largest car maker in the United States, first overtook Chrysler, then leaped over Ford, and is now right behind GM to become the largest automobile manufacturer in the U.S. and the world.  The changing of the guard is a matter of time.

The days of my grandfather when cars meant GM is long gone.  The American automobile industry has mismanaged its way into irrelevancy.  Starting with the 70s, the Big Three sought relief from the government and the American people every decade as Japanese car companies slowly, gradually, and methodically ate into their market share with smaller cars, better productivity, and competent management.  In the 70s, Congress extended a helping hand by bailing out Chrysler.  In the 80s, Congress showed sympathy by smashing Japanese cars on the Hills of Congress.  In the 90s, the White House showed toughness by threatening a trade embargo.  In the 21st century, the love has finally been lost, with prominent senators and congressmen actively calling for the Big Three’s bankruptcy.

And rightfully so, because $15 billion or $30 billion or even $100 billion (which they would come back to seek) won’t be enough to save the Big Three.  These companies are the same ones that, in the 80s, saw the Japanese succeed with small cars, promised to reorganize, yet took no action for two decades while masking their problems with their reliance on SUVs  as oil prices tumbled in the mid to late 90s.  When oil prices skyrocketed, not a soul was surprised that they lacked fuel efficient cars to sell while Japanese automobile manufacturers were selling out Preuses and other alike.  GM’s announcement earlier this year that it would be closing four plants that manufactured SUVs and trucks and concentrate on fuel efficient cars was shocking only in its untimeliness and not in the extraordinary number of factories dedicated to the production of gas hoggers.

The Big Three are not alone in feeling the consequences of the lowest auto sales in more than a decade.  Toyota, Honda and Nissan are all experiencing double digit drops in sales as well as significant needs for restructuring.  But they’re not running to Washington for a helping hand.  The most damning rebuke of the Big Three during the current crises has come from the deafening silence of the foreign manufacturers.  Sometimes, silence speak louder than words.  The current crises has crystallized what was obvious to many:  not all automobile manufacturers stand (and fall) alike.

Americans will no longer aide the Big Three simply because they’re American.  That affection is long gone, their good will squandered by two decades of continuous mismanagement and replaced by Japanese manufacturers who fostered their own good will in the South.  Rather, if they are to be saved, it would be because of that ever perverse economic logic, “They’re too big too fail.”  Moral hazard and fairness to the small(er) be damned.  Consequences of permitting not only one giant but three to fail would be catastrophic.

If the argument ever had weight, it would be in the context of the Big Three.  Bankruptcies by GM and Chrysler would turn the whole Mid-West into one large ghost town and send ripple effects to the supply manufacturers and dealers located in every state of the country.  The unemployment rate is expected to top 10% if that were to happen.  The job losses America is experiencing now would seem like peanuts once the Big Three goes under.

Notwithstanding, any interim bailout must be denied because of the bigger picture at stake.  Yes, the consequences of a failure to rescue would be devastating, but the fact is, the city of Detroit had been experiencing a one city recession for years prior to the current crises because the Big Three was aggressively cutting payroll.  And injecting $15 billion at a behemoth running out of cash wouldn’t make the slightest of difference unless we are committed to continuously throwing good money after the bad.

Because let’s not kid ourselves:  the Big Three will fail sooner or later, whether the government helps them today or in a decade.  Neither their past record their nor current attitude provides any hope that the Big Three can continue to operate in its current form.

The question we must ask ourselves shouldn’t be whether the Big Three should be allowed the fail.  Rather, the question ought to be whether the Big Three should fail with or without our help.  There is likely a future for the Big Three in a pre-packaged, planned bankruptcy which would permit the companies to drastically change who they are and become competitive once again.  Such bankruptcy would require the government to guarantee financing so a bankruptcy reorganization would not turn into a bankruptcy liquidation.  But if neither the Big Three nor the government prefers to take this sensible, long-term approach, then let the Big Three fail and let the market take its course.  Americans still need cars and Toyota, Honda and others would be more than happy to manufacture them hiring the old employees of GM and Chrysler in their old factories.

Will the process be painful?  For sure, and it’s most unfair to the employees who share very little blame for the instant crises.  But by taking courageous action today, we’d be spared the agony of watching the Big Three repeatedly return to Congress asking for help that they don’t deserve and they haven’t earned while they continue to tumble into obscurity.