The Cost of GM’s Death

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AUTOMOTIVE NEWS EDITORIAL

The cost of GM’s death

Automotive News | November 14, 2008 – 12:28 pm EST

If Congress thinks a bailout of General Motors is expensive, it should consider the cost of a GM failure.

Let’s be clear. The alternative to government cash for GM is not a dreamy Chapter 11 filing, a reorganization that puts dealers and the UAW in their place, ensuring future success.

No, even if GM could get debtor-in-possession financing to keep the lights on (which it can’t), Chapter 11 means a collapse of sales and a spiral into a Chapter 7 liquidation.

GM’s 100,000 American jobs will die. Health care for a million Americans will be lost or at risk. Hundreds of GM’s 1,300 suppliers will die. Their collapse could take down Ford Motor Co. and Chrysler LLC, perhaps even North American transplants. Dealers in every county of America will close.

The government will face greater unemployment, more Americans without health insurance and greater pension liabilities.

Criticize Detroit 3 executives all you want. But the issue today is not whether GM should have closed Buick years ago, been tougher with the UAW or supported higher fuel economy standards.

In the next two to four months, GM will run out of cash and turn out the lights. Only government money can prevent that. Every other alternative is fantasy.

The $25 billion in loans that Congress approved to partially fund improvements in fuel economy? Irrelevant. Dead automakers do not invest in technology.

The collapse of the global financial system has crushed the American car market, dried up revenues for the Detroit 3 and highlighted their weaknesses.

Each of the Detroit 3 is in crisis. But Ford, which borrowed big two years ago and thus has more cash today, may skip a bailout and the strings attached. Cerberus, which bought Chrysler last year, doesn’t deserve money. Government cash might help sell Chrysler to a strategic owner.

Some Detroit critics want their pound of flesh: Throw the bums out and install a government czar. Treasury Secretary Henry Paulson won’t use any of his $700 billion bank bailout money to help manufacturers. In any case, he’d need a guarantee that a bailout would make Detroit “viable.”

Well, nobody — not even AIG — is insuring guarantees for viability.

The taxpayer needs protection and an upside. GM’s top management may need to go. Government-as-shareholder deserves a big voice. Those details can be worked out.

The Detroit 3 CEOs and UAW President Ron Gettelfinger had better tell two critical congressional hearings next week what sacrifices they are prepared to make.

But the stark fact remains: Absent a bailout, GM dies, and with it much of manufacturing in America. Congress needs to do the right thing — now.
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http://www.autonews.com/article/20081114/ANA02/811149966/1078

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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8 Comments

  1. I think GM is not going to get any help. The Republicans in COngress and President Bush are really lined up against a bailout for the auto companies. It’s okay to help bank executives with government money (socialist actions) but if you’re talking about regular people like factory line workers, then it’s “Hey, buddy, this is capitalism. It’s a tough world. Get used to it”.

  2. There is a big difference between the two. The financial bailout helps everyone be able to borrow money: Big business, small business, individuals wanting to buy cars/homes. Is the fix ideal? Heck no, but it greased the skids enough to keep the financial sector funtioninal, at least.

    Bailing out auto companies is an industry specific action that the government should tread into very carefully. The same argument that, “if big company xyz goes under, thousands will lose jobs/health care” could be applied to any Fortune 500 corporation in America. Why should the automotive sector be singled out? There are dozens of big corporations on life support right now, if you crack this egg open, watch the queue to the White House/Congress get really long next year for all others wanting a bailout. You have to draw the line somewhere.

  3. Well, JV, I think the editorial well lays out why the auto industry needs assistance. All told, nearly 10% of the jobs in the country depend on the auto industry, and those jobs are concentrated in the Rust Belt region. This isn’t merely a matter of “xyz,” but of the nation’s largest industry.

    Moreover, the financial bailout was largely a sham. Instead of throwing money down the drain so that AIG execs could go to the spa, we could have simply nationalized the banks. The point was to make sure banks loaned money; they haven’t. The government should have took them over or simply loaned the money directly.

  4. I am basically against government bailouts, but that being said, with the government bailing out banks, also with all the farm supports and USDA spending to prop up farm interests, I dont see why they in this critical time cannot help the US Auto industry!
    One thing as history showed in World War 11, the Big 3 and other US Based companys came to our aid when we and the world needed them most!
    Congress and the President need to do the right thing in our countrys critical time in history and help them out,its not only the companies they are helping its also our national interest as well!

  5. It’s weird when you talk to people about this, because there are a lot of people that don’t want to talk about the economic aspect of this situation, they just want to air some grievance that they believe is connected to the current issue. The guys I work with say things like

    “I had to start over when the economy changed, and go to school so I could do a new job, so let them do the same thing.”

    “My 1982 Pontiac had a transmission that went bad at 42,000 miles and GM wouldn’t help me. Let them go under, and good riddance.”

    “American car companies can’t make good cars. I switched to Japanese cars in the 70’s and have never gone back, so I don’t care if they all go bankrupt.”

    “They (the American car companies) made nothing but trucks and SUV’s and didn’t help us by making cars that used less gas so why should we help them now?”

    “Those damn union workers are what are killing Detroit. If they just get rid of them, everything would be fine. It’s a cush job for a lot of money and great benefits and no else has jobs like that.”

    These kinds of responses may make people feel good on some sort of emotional level, but they don’t address the economic emergency that is looming if the American car companies go under. Sometimes I think Americans are not very smart about the economy.

  6. Any aid that goes to GM should be contingent on massive downsizing and restructuring. It’ll cause an increase in unemployment in the short term, but it seems very apparent that GM is not sustainable at its current size.

    Product bloat is apparent at every turn. Is there any good reason to have FOUR differently-branded crossovers based on the exact same Lambda platform? Saturn should have been closed years ago, and Pontiac and Buick should be next. Hummer and Saab should be sold to anyone who’ll take them, otherwise mothball them.

    The only question is what’s better — a sustainable GM at half its current size, a bankrupt GM, or a business-as-usual GM that relies on government subsidies to prop itself up for a couple more years hoping for a miracle.

  7. Planet wide, the car industry would be second only to agriculture in terms of Government support….why change now?

    BUT

    is a big bucket o cash for GM to spend anyway they wish the best way to go?

    For starters, why not bail out the car industry in terms of their health care and pension liabilities? Then GM/Ford and that other thing can get on with the business of making & selling cars rather than providing social welfare (which is the job of the community and therefore government). Next trick might be to bail out GM Finance….

    Ultimately, if the car industry stuck to the things it was good at (making & selling cars) rather than chasing additional profits in finance, stock, property and who knows what else….and accept the constrained profit levels…then there’s a pretty good chance it’d keep its nose clean.

    And if the US Government took some higher responsibility for health care & pensions (like Japan and much of Europe) rather than leave it to industry…then there wouldn’t be this other part of your business that you’d have to run that had nothing to do with cars….

  8. The government bailed out the airline industry, so whats the difference?

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