Thursday, December 04, 2008

Reid, Pelosi, & Co. are not Investment Bankers

The “Big Three” automakers are running out of capital. Their business models have not adapted successfully to changes in the global marketplace, and in particular, to changes in our own domestic markets for personal transportation. Ford, GM, and Chrysler products have long been losing market share to their foreign competitors. Consumers have been voting with their pocketbooks, and they have been choosing products from other manufacturers. The reasons for these choices are complex, and they are certainly open to debate. High labor costs, which have failed to deliver sufficient productivity gains to keep these manufacturers competitive with other firms, have a lot to do with the cause. But the writing on the wall could not be clearer: these companies have not been successful.

Figuring out how to make them successful is a challenging process. Chrysler attempted to deal with its competitive challenges by merging with European powerhouse Daimler-Benz. This firm put a lot of capital on the line in that merger, and presumably backed up that capital with the best managerial talent they could find. They ultimately concluded that this merger would not bring the value they intended to create. Chrysler was spun off and a private equity firm now owns the company. This process has taken several years, and plans for change in that firm are still presumably under development.

Likewise, Ford and GM have both been struggling with their business models. Their executives have tried to acquire foreign brands, in much the same way that Mercedes-Benz attempted with Chrysler. Ford’s acquisition of Volvo provided some technological benefits with regard to safety, which have been integrated in other products. However, it chose to sell off its investments in Land Rover and Jaguar, which ultimately could not be successfully integrated into a viable profit-generating center for the company.

In the meantime, foreign manufacturers, initially shut out by trade barriers, have located their production facilities in the United States. They employ thousands of workers, and they have provided significant capital investments in plants, equipment, and human resource development in this country. Eleven firms, not three, manufacture in this country.

The day of reckoning has come. The Big Three are running out of cash. The wheel has turned, and it is time to evaluate whether these firms can continue. The current economic crisis had something to do with hastening that day, but it is not the cause of their demise.

The automakers are now seeking capital from the lender of last resort – the U.S. government. Of course, this means that taxpayers will pay – there is no amorphous “government” that does not involve us. Our investment will come from forced exactions by the government, not voluntary investments based on the motivation of potential profit.

The decisionmakers for allocating that capital – the Congress – have not done so well in economic matters. They spend far more than they take in. They have sponsored the enterprises (i.e., Fannie and Freddie) that bear a good deal of responsibility for the current credit crisis. But the American people reelect them with regularity, and have recently chosen to entrust the economic wellbeing of the country to their care.

When the automakers came in October, the Congressional hearings were an opportunity for show. Exposing the private jet travel of executives makes for good political theater, but it has nothing to do with the solution to the financing problems of the automobile companies. Nor is the level of their executive compensation. Spreading all the jet costs and all the executive salaries and bonuses over total production will not meaningfully reduce the cost of producing a car; nor will it make particular models more desirable for consumers.

Congress sent the automakers back to make a plan – in a few weeks – about how they would change. This is also great political theater – but of no significance. Pelosi, Reid, & Company are politicians, not investment bankers. To suggest they are competent to make these decisions about how to change and restructure companies, when the private sector has not been able to do it in years, is foolish. Congress will probably spend our money on this, and they will attempt to justify it by the fact that they are trying to do the same things in so many other areas, including alternative energy. But this is neither a reflection of competence or justice.

We should let markets decide the future of these companies. The world will not end without them; nor will their assets remain unproductive. Others will acquire those assets and build the cars and trucks that are successful, and they will do so competitively.

EAM/EPG

3 comments:

Matt Smaldone said...

Ed, I've had to spend quit a bit to fund my wedding, coming up in February. Since you have a great grasp of what congress is really doing to our economy and country, I would like to utilize your talents for analysis and writing to my benefit. I'm going to apply to congress for a bailout plan! It's all the rage now and maybe if taxpayers begin indivually applying for bailouts congress will circuitously get to the point of...cutting taxes! Your friend Matt in Denver, who until now was a virgin at blogging.

Anonymous said...

Congress should help bail everyone out! It might be cheaper to give everyone $50,000 to $100,000 to shore up the economy. On another note, everyone should learn to live within their means. Especially if they are getting married! I hope your wife will be better at finances than her mother currently is. Otherwise, a bailout from the Federal Gov't won't help you.

Anonymous said...

Toyota imports 65% of its cars from Japan which are then sold here. Just so you know.

I disagree with all of your assumptions except for the world not ending. I don't have enough space here to describe it nor have the ability to obviously convince you.

The liberal wing is in power now. Their number one, number one, goal is to protect U.S. jobs. This is a drastically different goal than your conservative ones.

Reid, Pelosi, George Bush (yes, Bush is at the front of this bailout movement) and company realize these jobs are more important than your free market ideology.

It was interesting to see the US Senate vote. All senate Republicans voted against the bailout. All Democrats voted for the bailout. George Bush went against ALL Republicans and was going to fund the bailout. Interesting.