21 thoughts on “An Automotive Bailout?”

  1. I think this could turn out to be the Democrats’ version of Bush’s failed immigration reform. IOW, grass-roots outrage over forcing ordinary taxpayers to bail out well-to-do union members may overwhelm conventional political considerations.

  2. If the Fed makes me buy a Detroit product by proxy through a bailout, I’ll never purchase another Detroit product again.
    They must go bankrupt, get their act together, and continue on, as the airlines have done.

  3. Or not. Try to buy a US television lately? Are you the worse for that? Would it be the end of the world if the Big 3 were Toyota, Nissan and Honda, for the next 50 years? At least they make cars people want to buy.

  4. labor unions are like cancer. Removing them normally kills the patient. So does keeping them. Better to let the patient without taking extraordinary measures to prolong life.

  5. In principle, the Congress is supposed to make laws having *general* applicability, with the binding to specific cases done by the judiciary and the executive. A Congressional rescue of a particular company is kind of like a bill of attainder in reverse, and has some of the same problems.

    It seems like increasingly, Congress is dealing with the specific caes, and the courts are definiing the general principles.

    Seems like what Congress *should* being doing is: if Chapter 11 bankruptcy doesn’t fit the situation, for whatever reason, then modify the bankruptcy code to come up with a set of provisions that *do* fit.

    One approach might be for the companies to enter prepackaged bankruptcy, with the government providing the post-bankruptcy (debtor-in-possession) financing, and also guaranteeing the warranty claim reserve so that customers could buy the cars without fearing that their warranties could be worthless.

  6. What is this, a Year of Jubilee for the politically favored?

    Notwithstanding the $34 billion price tag being discussed today, according to a presumably knowledgeable guy at Moody’s, we’re really talking $75-125 billion just for the auto industry.

    Grazing (Midwesterners don’t surf) over here, we find, among lots of other useful information — I encourage all our readers to compute their own personal DSR and FOR — that the average new car loan is over $25,000 (and typically represents all but 7% of the price of the vehicle).

    So $125B/$25k is 5 million “free” cars, or rather, cars that won’t be marketed, sold, and paid for in the usual manner, thereby completely severing the already tenuous connection Detroit has to reality.

  7. Discussion of Detroit’s woes has tended to focus on the pay & benefits of the manufacturing workers, but there are also issues with the sales channel. There are too many dealers, too close to each other, and they focus most of their attention on selling (if you can dignify shouting “we’re the cheapest in town!” as *selling*) against other dealers of the same brand.

    It’s been suggested by some that a guy like Steve Jobs could successfully run a Detroit car company, but I think Steve J would quickly lose his mind if he had to sell his products through a channel like the ones the auto companies have. And it’s almost impossible to change, given existing contracts and state franchise laws.

    Channel changes might, however, be possible in a Chapter 11 situation.

  9. > Would it be the end of the world if the Big 3 were Toyota, Nissan and Honda, for the next 50 years?

    Especially not with Isuzu, Subaru, and, of course, Tata nipping at their heels to keep them spry and hopping.

  10. > labor unions are like cancer.

    I’d say more like toxins. There are some toxins that are hormetic in nature. Labor Unions are kind of like that.

    The UAW is way past being hormetic.

    > It’s been suggested by some that a guy like Steve Jobs could successfully run a Detroit car company

    1) Jobs is good at selling a Lexus. He’d be lousy at selling Civics. (Yes, I note the irony of using foreign brands to make my point)

    2) Jobs would have no patience with the level of idiotic micromanagement from Congress that comes in the form of CAFE standards and other crap. He’d toss the unions out on their ass, but there’s not much he could do about CAFE and other idiocies.

    “Mr. Jobs, I see here that you haven’t made any effort to provide any assistance for low-income people to buy their own Ipods. This strikes us as discriminatory and “unfair”, and we suggest that, if you can’t do this on your own, that we’ll have to pass laws requiring it of you…”

    “Mr. Jobs, we note that you don’t make any Ipods which hold only 50 songs. We feel that this end of the market is under-represented, and that you should produce a large number of these models to encourage people to purchase them. If you feel you can’t do this, we are sure we can pass a law which will increase your desire to do so…”

    …And so on.

  11. My view is the only group dumber than union leaders are the big three auto management. They’ve been warned for decades they needed to take a shut down hit if necessary to get labor costs under control. But Noooooo, they found it more convenient just to pass the cost along, first in the hope that the Germans and the Japanese couldn’t break there all but in name monopoly. Then they hoped that the economy would go up forever. And boy have they spent money on politicians. The politicians took there money and shafted them anyway. Also they were convinced that they new what the customers wanted despite outside surveys that said different. The whole mess pretty much ossifed back in the late ’70s.
    Bankruptcy is the best option, new management, new labor contracts, and etc.
    I remember a Polish immigrant who wanted an American Car. He found out that it was from Brazil, Mexico,Japan, and etc. Very little from the US. I told him he would have been better off buying a Toyota Corola or Chevy Prizm that are put together on a twin assembly line in California.

  12. I am warming to CAFE a bit. I think it’s a bad idea, but better than CO2 cap or gas tax. It could potentially work as economic stimulus. If fuel efficiency can be improved without great cost, it would decrease fuel prices and induce demand (ie, create economic activity).

  14. Here is the Deal:

    Chrysler is cut loose. They can sell the few good bits: Jeep Wrangler and Grand Cherokee, the Minivans, and the Ram factory. The rest: liquidation. This will all be done through a C11. The dealers and the union have to be crammed down before they are flushed down the WC.

    GM: DiP financing. GM files C11 and Uncle Sugar puts up the DiP financing. GM gets new top management. GM sells Buick to SAIC, sells or shuts Pontiac, Saturn, Hummer, SAAB, shuts GMC. Chevrolet and Cadillac are the survivors. They probably ought to be spun off as completely separate companies. Open questions on foreign operations. Dealers and unions get the pipe.

    Ford: TARP buys $4B in preferred stock. Ford family abolishes dual voting common stock structure. UAW agrees to cram down legacy costs and takes stock in payment. Dealers must die, so Congress must override state franchise laws.

  15. Those franchise laws are nothing to sneeze at here in Wisconsin, they are held up time after time in the courts. It would take federal action to erase those if the big 3 really want to cut dealers.

  16. Dan: I think being held up is an entirely different experience than being upheld. But, you are correct, Congress will have to override the state franchise laws so that the Dealers can be crammed down outside of a C11.

  18. > I am warming to CAFE a bit. I think it’s a bad idea, but better than CO2 cap or gas tax. It could potentially work as economic stimulus. If fuel efficiency can be improved without great cost, it would decrease fuel prices and induce demand (ie, create economic activity).

    Aaron, CAFE is ludicrously stupid. It effectively demands auto makers make cars which they know they can’t sell and then destroy them as a part of the business cost of operation (you only have to make your fleet of cars produced match the standard, you don’t have to actually SELL them).

    The notion that it encourages the development of more fuel-efficient vehicles is inherently defective. Market forces will automatically do that. Graph here. And related story here:
    The Largest Record of Conservation in U.S. History?

    The limits on increasing fuel efficiency are subject to the laws of physics. While cars can be improved, there are limits to how you can do it

    1) you can make the car slip through the air better (and amazing strides have been done in this area in the last 30 years). Much further improvement in this area requires tailoring the car’s shape to fit an improved curve, and that impacts a number of issues such as functionality and crashworthiness.

    2) You can substantially reduce other constraints, like acceleration and weight. This impacts the ability to safely get onto a highway as well as crashworthiness, and, even more importantly, comfort. I just had an argument with my Democrat/Liberal uncle (over six feet tall, with big feet) whose justification for having a huge American gas-guzzling behemoth is that his foot keeps hitting the brake pedals when he goes to put his foot on the gas. In other words, there are comfort/usability issues when you decrease the size to decrease the weight.

    3) Other mechanisms for producing the motive power have not shown much promise, yet. Gasoline is a remarkably appropriate mechanism for transfer of energy. It’s volatile, but not too much (unlike hydrogen). It’s compact and comparatively lightweight (contrast to batteries, which reduce efficiency by adding lots of weight). And it provides adequate range (ca. 200-450 miles) on a quick refill cycle (5-10 mins at the pump) for a reasonable price (at its worst, a tank of gas was ca. $60 or less for most Americans, for about a week of typical driving).

    4) The internal combustion engine isn’t particularly efficient, but it has been improved about as much as it can be, and no other design has shown any real promise in the big three areas of greater efficiency, cost of production, and quick-startup (people want to get in their cars and go, not wait for 10 minutes for it to warm up, which is, for example, the major problem with steam engines). Consider that any “improvement” has to balance out the added cost of the design against the efficiency gained. It’s easy to show that a car like the Prius doesn’t pay for its added expense in any way for over six years of ownership even at $4/gallon of gas, over the best-mileage “standard” vehicle, unless you drive far more than the average American. It’s a stupid buying decision. Anyone who bought a Prius can add about a month to that ROI-period for every month we get of $2 or less gas (and that ignores the lost opportunity costs of that extra expense plus its financing, as well).

    QED. CAFE is ill-considered, ill-functioned, and just plain ill. And I don’t mean “illin'”.

  19. > Saturn

    I’d argue Saturn is one they should keep. I don’t know anyone who has owned a Saturn who isn’t a loyal customer or speaks ill of them. It’s probably one of the few Big 3 divisions Doing Things Right.

    Brand loyalty is a good goal for the auto industry, which is necessarily becoming a service industry. What kind of satisfaction of ownership do car owners get? That’s the missing problem for the American industry, because I’ll lay odds it’s quite low. I’ve heard good things about Buicks, too. Ford? I had a friend who owned four Mustangs in a row, buying a new one every couple years — and got so disgusted with them on the last one that he hasn’t bought another in about 10-15 years. That’s how the Big 3 got where they are.

    The manufacturing end itself should slowly come to resemble the scene in Minority Report, where Cruise gets a new car built around him on the factory floor, which he drives off himself. No people involved other than to spot-check things occasionally.

  20. First: No bail-out, go through bankruptcy!
    Next let me say a good word for Detroit, GM makes very good products! Currently have 3 vehicles, 2 GM, 1 Lexus, newest a the Lexus, The oldest GM is a 1990 model, quality difference, not worth the $35,000 between the Lexus compared to the other 2 vehicles. The GM product I replaced with the Lexus, currently has 250,000 miles and still going strong, so let’s forget the false quality argument. Plus my GM pickup recently saved the life of my wife and I returning from skiing last week, in the Lexus we are dead, in my pickup, I drive away and buy a new tire! Note the southern car industry in the US gets a lot of state government subsidies, Detroit does not! GM commoditzed the auto, created most of the goodies we see on cars today, let’s not stupidly throw them away!

  21. Stan in Sugar Land,

    Note the southern car industry in the US gets a lot of state government subsidies, Detroit does not!

    The “subsidies” that southern states give manufactures almost always comes in the form tax breaks for companies that build new plants in the state. Northern states are quite capable of matching such breaks if they chose to. It is merely the political culture of the region, which is overtly hostile to those who create wealth, which prevents them from doing. Most in the north seem to regard people who open factories as some kind of criminal class who must be continually regulated and threatened.

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