Wednesday, November 12, 2008

No Bailout for GM

There are 11 auto manufacturers in the U.S. today. This is seven more than the U.S. had 40 years ago. Thus there should be little support for a bailout for GM or Chrysler. Due to their non-competitive cost structure, GM's and Chrysler's long-term economic future is doubtful. A bailout would only delay the inevitable insolvency of both GM and Chrysler. "Too big to fail" is a failed policy. In the event of their failure, work will be simply shifted to their more productive and lower cost U.S. competitors such as BMW, Mercedes, Hyundai, Honda, Toyota, Nissan, Ford, and Mitsubishi. All of the listed companies are global in scope. These producers are owned by U.S. citizens (among others), pay U.S. taxes, employ U.S. workers and have U.S. citizens on their upper management team.

Management and unions representing workers at GM have failed. A vital market based economy demands that success be rewarded and failure be punished. In this case, management failed to recognize how dependent company profitability was on large cars and low gasoline prices. Unions failed by pressing for wage and benefit concessions that were greater than the market could bear. The only reason to bailout GM is political. And mixing politics and economics normally results in lousy outcomes.

Ernie Goss

4 comments:

Kyle S. said...

agree 100% Ernie!

Anonymous said...

The bailout would not only narrowly help GM and Ford but more importantly provide an opportunity to lead the way in auto manufacturing into green energy.

The benefits of green energy are numerous. First, it allows the U.S. to reduce oil and carbon emissions responsible to a degree in climate change. Second, it will allow us to reduce oil consumption thereby reducing money sent to middle eastern countries who do not share in our goals. Third, and most important, U.S innovation in green energy will allow us to have a distinct advantage over other economies.

The helping hand in this case would be the government loans as governments can afford trial and error where businesses cannot. Once the solution is found, we can start to make the markets to supply it.

I recently finished "Black Swan: The Impact of the Highly Improbable" by Nassim Taleb. Who'd of thought the black swan of globalization would be adversely against ourselves. We've taught other countries precisly the stuff which kept us at an advantage. Now we have an intellectual race with countries never seen before to be competitive.

GM, Ford, and Chrystler's financials paints a pretty grim picture. They certainly are taking a beating. This tough road these companies are on though is mendable.

The path to help the car companies is tough. But look on the bright side, the road is much easier than Investment Banking Blvd.

adam hartung said...

If America bails out GM and/or Ford we should demand a change in the leadership and management teams. Until someone Disrupts these companies and changes their management approach these companies will not be viable competitors. Read more at http://www.thephoenixprinciple.com

Anonymous said...

Wrong again Ernie Goss. I just spoke to an internationally renowned business consultant today who specializes in private equity. To be brief, after he explained the complexity of the auto industry and the other industries that are connected with it, his conclusion was that "hopefully nobody is stupid enough to not support an auto industry bailout." Today I learned that Ernie Goss is part of the "stupid enough" club.