It looks like Congress has come up with a bailout plan for the Big 3 automakers. I’m in favor of some assistance to the companies, but only if it will result in meaningful changes in the car companies that will cut their labor and benefit costs (thanks for the link Heritage Foundation!), reduce the number of dealerships and brands that cannibalize each other. Consolidation and production cuts will also be needed to match output to current demand. When it is all said and done, if the bailout and the restructuring result in the Big Three becoming the Big Two or the Not-Quite-As-Big Three, that would be much preferable to having three inefficient, lumbering corporate beasts that will likely need to be bailout again in the future.
The details of the automaker bailout look similar to the financial sector bailout in some ways…the government gets an equity stake in the companies in exchange for credit (for the automakers, this will be 20% of the credit given) and there are limits to dividends and executive compensation. However, the automaker bailout has some differences and in many ways will function like a bankruptcy. The government will appoint a “car czar” that will preside over the restructuring of the companies (not unlike a bankruptcy judge) and try get the companies to renegotiate agreements with the labor unions, suppliers, and other creditors so that the companies can eventually return to profitability.
There are some good parts of this plan. The automakers need a bankruptcy restructuring so that they can get rid of their long term labor and other costs that put them at a permanent competitive disadvantage. However, the Big 3 (and many others) believe that bankruptcy is not a viable option for the companies because no one would want to buy from a bankrupt car company and sales would further plummet. So if this bailout can let the needed changes be made without technically calling it bankruptcy, that would be a good step. And if the “car czar” feels that progress is not being made by one of the companies during the restructuring, he or she could withdraw the loan, which would basically force the bankruptcy and liquidation of the company (Harsh!)
However, the fact remains for the American car market that there is excess inventory and production that must come down. The Big 3 are making more cars than people will buy. There needs to be some consolidation and/or elimination of some brands or even whole companies (I’m looking at you Chrysler!). GM cannot continue to make GMC and Chevy trucks. There is no reason for Buick and Cadillac. Pontiac has been dead in the water for some time (perhaps since 1991?) even with this wonderful attempt.
Personally, I think Chrysler is the most expendable and prime for making an example of, while preserving the other two larger companies. I don’t see why a private equity firm needs to be bailed out. They made the decision to try to turn the company around and failed. They should be allowed to fail, just like they would have been allowed to reap the profits if their turn around had succeeded. If this means Chrysler has to be broken up or closed down, that would be fine. Chrysler has some assets that could be sold…Dodge has some decent-selling cars that might make it an attractive fire-sale acquisition and the Jeep brand is still well known, even if Chrysler has watered it down (does the world really need a Jeep Compass, Cherokee, Liberty, and Patriot? They all look fairly similar to me…).
Ford seems to be in the best shape of the Big Three, since they lined up credit before the current credit contraction, but they still need to cut costs, reduce dealerships, and make its fleet more competitive and fuel efficient (Yay Ford Focus!) if it is going to be viable in the long run.
What do you guys think? Save em? Let one or more crash?
I think you are right that Chrysler’s private equity firm is less deserving of a government bailout. If it fails, it would suck for all those people to lose their jobs, but without drastic restructuring of the company, it seems like this bailout would only postpone the company’s inevitable collapse and the subsequent job losses. On the other hand, I guess you could argue that might also a worthwhile goal – maybe since everything else in the economy is so shaky right now, it would be worth the price of the bailout to postpone the failure of Big 3 a couple years until the economy is stabilized and better equipped to deal with the shock.