I am in principle against all bailouts. That said, bailing out the banks will fix their fundamental problem. They are hemorrhaging cash and the bailout will resolve this. Whether or not it will save the economy is of course a different story. Bailing out the automakers, on the other hand, won't resolve any of their fundamental problems. All it will do is throw good tax payer money after bad private money into a failing business. The automakers are facing several fundamental problems and until they are resolved we could give them one trillion Dollars and still not resolve anything. Here are the problems they are facing.
1) Taxes in Michigan are enormous.
Both the sales and income tax in Michigan were recently increased. This makes it difficult for the automakers to make a profit. It makes it difficult for the automakers to sell cars. It makes it difficult for the automakers to attract new workers. If ever was there an example of the corrosive effect of high taxes it is the corrosive effect that high taxes have had on the automakers.
2) Detroit is not competing with foreign automakers.
There is no other way to say it but that Detroit is not getting the job done. Foreign automakers are making better, more affordable, and more marketable vehicles. Detroit is run poorly by management that should be removed from top to bottom.
3) Detroit is hemorrhaging cash from pensions and retirement plans.
For decades the powerful UAW negotiated compensation packages that included pension plans that made most other industries jealous. Of course, now the automakers are paying out billions yearly to folks that often haven't worked for the company for ten plus years. The overly generous pensions are simply too large for the automakers to continue to pay.
GM just reported their quarterly earnings and they lost roughly $7 billion. That means an infusion of an extra $25 billion would only keep GM afloat for three more quarters. Without fixing the three problems above though, each will continue to lose money and be in need of new bailouts. Without addressing these three problems, any further bailouts would merely be throwing good money after bad.
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3 comments:
Gr8 article. Precise and to the point. I like the way you have simplified the major problems detroit is facing. I couldnt agree with you more. Until these auto companies change their culture and quality of cars, no amount of money is going to help them out. Even with the bail out today, these companies will be in the same position in a few yrs...
I concur with two of your points concerning why it is wrong to subsidize Detriot. I used to be in favor of some help for domestic auto makers but painfully have to admit that it would be wrong. I enjoyed your concise summary of the problems Detriot is facing. However, I take exception that The Big Three have not been manufacturing good quality fuel efficient autos and vehicles that the consumer wanted.
For many years consumers did want to drive F150s , Silverados, Dodge Rams, Suburbans, Expeditions and even Hummers . All of these would on averge get 20MPG or less , depending on engine size and weight of vehicle. These Vehicles are good quality, the F150 was a big money maker for Ford until recently. The rapid increase in fuel prices lowered demand for this type of vehicle as it did for competitor Toyota Tundra, Nissan etc. For many years GM, Ford, and Chrysler have been manufacturing small fuel efficient vehicles such as the Ford Focus, Escape Chevy Cobalt. I know friends who own these and they like these vehicles. I think the quality of domestic and foreign vehicles is about the same now. Several J.D.Powers surveys affirm this . GM ,especially , has to add $1500 to $2000 to the price of their vehicles to cover benefits to current and former employees, until this is scaled back I do not see how they can compete. UAW officials recently have stated that
the unions will not renegiotate - I was a union member at one time but I never could figure the logic of why it is better to not take a pay and or benefit cut or the alternative to having no job !!!!!!
Rick
I think it is simplified to say they built good cars. I said they aren't competitive. That is a much broader term. They simply can't get folks to buy their cars. If they are making good cars, as you say, then it is marketing. There are many reasons why a company isn't competitive, making an inferior product is just one of them.
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