The U.S. Government Must Provide Loans to Assure The Survival of GM, Ford, and Chrysler

We’ve heard a lot of news from the press lately about the dire situation the American automobile industry is in. In part due to the “financial hurricane” that the credit crisis has created, the Detroit 3, (D3), including GM, Ford, and Chrysler are on the brink of going bankrupt or closing up completely. As a former GM employee who loves cars, and cares for Detroit, my friends who work in the auto industry and our whole country, I believe that the government must provide loans to the Detroit 3. Blame can be laid on many things but a negative spin about the Detroit 3 has gotten out of control to the point that people have a grudge beyond reason, one that could lead to our government making a horrible decision. I don’t mean to dismiss mistakes of management and the possibly unreasonable demands of the unions up to this point, but the issue is not who we should punish but what we should do now to prevent a catastrophe.

I’ve written on countless numbers of website comment sections and based on what I’ve written, I want to address all the claims others have made as to why they think the Detroit 3 shouldn’t get support in the form of a loan, (not a bail-out). Please don’t quote me on the exact numbers as these are estimates, but read this with the understanding that I do know a lot about the auto industry from experience and interest. Feel free to research some of my general figures.

Here are claims and suggestions listed, with bullets beneath them addressing why the suggestions aren’t feasible, the claims are overstatements or just aren’t true.

The Detroit 3 don’t make cars that people want to buy:
- Ford, Chrysler and GM sell nearly half the vehicles purchased in our country. 50% of the customers are not nobody, and many of these customers are loyal repeat ones.
- The Detroit 3 had fewer competitors in the 70's than they do now, so some market share attrition is bound to occur by virtue of there being more choice.
- GM sells the most mid-sized cars of any manufacturer, but they are spread out amongst many models with different styles but the Honda Accord and Toyota Camry get all the credit for their manufacturers

The D3 only make gas guzzlers and SUV’s:
- They did profit from the SUV craze but so did/do all the other competitors. Consumers tended to equate value with size and the D3 couldn’t get its typical consumer to buy small cars at prices that would be profitable.
- Admittedly, they should have started making hybrids earlier but that’s a small slice of the market. - For the segments that sell the most, American car company vehicles are amongst the most fuel efficient in their segments such as the Chevy Malibu, Saturn AURA and Ford Focus...
http://www.freep.com/article/20081117/COL14/811170379

The quality of vehicles from the Detroit 3 is not nearly as good as that of the Asian and Europeans:
- The quality gap has narrowed significantly and in some cases, D3 products have better quality than Toyota and Honda, (Chevy Malibu and Ford Fusion are prime examples in JD Powers studies.) http://www.freep.com/article/20081117/COL14/811170379
- Toyota recalled more vehicles last year than GM did http://forums.motortrend.com/70/6495664/the-general-forum/recall-numbers-for-2007-honda-toyota-numbers-highe/index.html

If the Detroit 3 go under, the import competitors will just sell more cars and provide just as many jobs:
- The Detroit 3 employ far more people in our country than foreign-based companies. It’s not just at plants but at headquarters white collar professional, engineering and technical jobs.
- If any one of the D3 go under, then many suppliers will go bankrupt leading to more job losses and parts will stop flowing to the Toyota, BMW, Honda plants here. That would lead to (at least temporary) layoffs at the transplant company plants.
- No other company is going to take up slack in our industrial base by starting a large, new auto manufacturing company as the major investment, expertise, low profitability, and economy would be inhibitors. Small companies like Tesla and Fisker will take tens of years to become mass market manufacturers, (assuming they succeed).

The loss of the D3 won’t matter to our national security since they don’t make tanks, missiles or airplanes:
- Manufacturing capability is needed to quickly convert plants to make war equipment in the event of a major military conflict.
- We can’t count on foreign companies like Toyota or Mercedes to make war equipment for the U.S. military. - The D3 were essential in our prior war efforts
http://www.allpar.com/history/military/preparing.html
http://www.answers.com/topic/general-motors (Hit CTRL-F, then search on “world war” in the page)

The loss of the D3 won’t affect jobs and the economy outside of the auto industry and the Midwest:
- All of the D3 have plants in other parts of the country and their suppliers are in nearly all of our states - The D3 are some of the largest purchasers of healthcare, pharmaceuticals, and advertising.
- Local businesses near closed automotive plants and dealers would lose much of their business forcing many to shut down.
- The D3 shutting down would lead to the demise of our remaining manufacturing base. Service industries generally don't provide nearly as much boost to exports, and service jobs generally don't pay as well or provide as many benefits.

The D3 should just go into bankruptcy and get rid of their medical and pension obligations and emerge as stronger companies:
- Unlike plane tickets from bankrupt airlines that are only a few hundred dollars and are used up quickly, a large majority of people won’t buy cars from a bankrupt car company for fear of not having parts and service available as the vehicle gets older.
- If the D3 had to sell cars under bankrupt status, they would have to discount them heavily to sell, thereby reducing product profitability further.
- Because bankruptcy will pardon the companies of some of their contractual obligations, millions of employees and retirees will lose health and pension benefits. This will impose a bigger burden on our government spending forcing us to indirectly pay more for many years.

Other foreign companies will develop more hybrids and electric cars which will allow our country to become energy independent:
- If all the battery, powertrain, and alternative fuel technology and patents go to companies from other countries, then we will have lost self-sufficiency when it comes to being able to wean ourselves off of oil.
- We will have to look to companies from other countries to provide essential transportation of people and goods within our own country. This is also detrimental to national security.

The only reason the D3 are in the shape they’re in is because of poor management and union contracts:
- While it can’t be said the companies have been managed well, remember that they have to pay an extra $1,500 to $2,000 in costs for each car in the way of health care and pension benefits. This puts them at a significant disadvantage in terms of the features and quality of materials they can use.
- Other countries have practiced unfair trade with currency manipulation to keep their prices here low and trade barriers that essentially close their markets to D3 products while ours are open to their products.
- Without easily available loans and leasing, the auto industry cannot sell or lease cars to individuals that don’t have great credit scores.

The D3 don’t listen to the customer since they should have known people want fuel efficient vehicles and should have made them available more quickly when gas prices spiked:
- All of the automotive companies do comprehensive market research and up until very recently, customers didn’t want fuel efficient vehicles. They instead bought SUV’s not stationwagons, and V6’s instead of more efficient 4 cylinder engines.
- It takes at least two years to make significant product changes and 5+ years to develop a new product from a clean sheet of paper.
- If people really wanted fuel efficiency, they wouldn’t have bought many of the SUV’s and the more powerful engine options in such high proportion.
- Even though they could not have foreseen such a drastic spike in fuel prices, it’s true that they should have had a few more efficient alternatives in their portfolios. I advocated this in 2003 while I was at GM.

The Detroit 3 haven’t come out with any innovations or new technologies in a long time so that’s why they are suffering:
- The D3 have recently offered many fuel-saving technologies concurrent with their foreign counterparts, (and in some cases earlier), with four cylinder turbocharged engines, features like cylinder deactivation, direct injection, less expensive mild hybrid technology, continuously variable transmissions, six speed automatic transmissions on mainstream cars.
- GM is working on the first plug-in hybrid, the Chevy Volt which will allow a person to drive 40 miles without gasoline by charging batteries through the electric power grid.
- Ford’s upcoming Fusion hybrid will get fuel economy of 39 mpg in the city, better than the Camry hybrid.

Not giving the D3 loan money would save the taxpayers billions of dollars:
- To lose millions of jobs associated with the auto industry would result in billions of dollars of lost tax revenue for years to come, much more than a 25 billion dollar loan.
- Government expense for unemployment benefits and health care would also cost us billions.
- Remember that there is a good chance that the Detroit 3 will pay back the loans with interest while providing a boost to our economy with their reduced cost structure and new products.

The D3, (GM especially), have too many brands that they should just get rid of to save money:
- There are strict dealership franchise laws that don’t allow car companies from closing brands without compensation and legal hurdles.
- Killing brands will kill market share even further in the near term, thereby worsening the companies’ financial situations.
- Getting rid of brands will leave the D3 with suddenly devalued inventory which will require heavy discounts to sell the vehicles. This will lead to reduced profits in the short term.

I want to reiterate that we shouldn’t excuse management miscues of the Detroit 3. They can be faulted for not having a more diverse portfolio as in adding a few more small fuel-efficient cars and hybrids. If it weren’t for oil speculation causing a huge spike in gas prices and for the banks’ shady practices pulling the rug out from under the loan and leasing credit markets, they would have been able to survive without government assistance. But the playing field hasn’t been level. Survival in the near term often required bad decisions for the long term so we are in our current situation. One can’t blame current management for promises made by former executives who are no longer alive. These executives have to deal with the hand they’ve been dealt including old plants, older workers, union contracts that they are obligated to follow. The press often loses sight of the fact that the companies have refocused their product portfolios and made significant cutbacks already. One only needs visit Michigan to see how many people have already lost automotive jobs. The D3 have renegotiated contracts with the UAW, but those new terms don’t take effect until 2010.

I was not impressed with the showing of the auto execs at the hearings last week. They were not compelling and the fact that they flew there on private jets made headlines, but the grandstanding done by the members of congress was not productive. I didn’t see the same level of questioning for the bank executives before they received much more in funding. Why weren’t they asked to come back with steps on how they would restructure their bonus system so as to prevent the formation of bogus un-backed financial instruments? At least the D3 were producing products that people derived utility and pleasure from. Instead, the banks were profiting from pushing numbers around and creating fake value in people's investments by exposing us all to excessive risk. I would argue that their situation is more of a direct result of their own greedy decisions and less a result of circumstances beyond their control.

Mitch Albom says it better… http://www.freep.com/article/20081123/COL01/811230371/0/BUSINESS01

Warren Brown talks sense here...  http://www.washingtonpost.com/wp-dyn/content/article/2008/11/21/AR2008112101348.html

I agree that the banking industry is vital to our economy, but I would argue that it does not affect as many jobs and that individual bank companies are more easily replaced. Other countries are smart enough and shrewd enough to know that they must nurture their manufacturing base while many of us here in the US seem content to just let it fade away regardless of the consequences. Their governments provide technology investment, pensions, and health care to reduce the burden on their companies. To look at the situation another way, we shouldn’t abandon a whole region of the country that depends on this industry. To do so would be unwise and show a lack of compassion for millions. It’s not about following rules; it’s about real people and our future. If this “financial hurricane” were a naturally occurring one that somehow swept through the Great Lakes, the rest of the country would be more than willing to help. Please write to your congress representative and senator to provide the Detroit Three with government loans. It’s critical that this happens before it’s too late for any of them, and subsequently for all of us.

+ Atul

Comments

[Chris Wood]

Any assistance plan must come with conditions. Executive compensation must be limited, and the companies must develop more alternative fuel vehicles.

[UH2L]

Good point Chris. I forgot to mention those things.

[Ravindra Kharmai]

Good points, and here a few other articles that supplement your view:

http://scrippsnews.com/node/38114

http://www.freep.com/article/20081117/COL14/811170379

http://www.washingtonpost.com/wp-dyn/content/article/2008/11/21/AR2008112101348.html

***Correction: GM's first plug-in hybrid (PHEV) vehicle is actually the 2010 Saturn VUE in which GM would still be the first full line vehicle manufacturer to bring the technology to market. The Chevy Volt is technically a Electric Range Extended Vehicle (EREV) and NOT a hybrid in the conventional sense. The difference is that traditional hybrid vehicles use both internal combustion engines and electric motors to propel the vehicle, whereas the Volt is driven only by the electric motors. The gasoline engine serves as a generator to recharge the batteries.

http://freep.com/apps/pbcs.dll/article?AID=/20080917/MULTI/80917011/1014

[Todd]

Atul,

I appreciate your passion. Other things to consider:

1) I guess the auto industry needs better lobbyists - or at least some key personnel directly invested in the future of the industry. Why are banks/insurance getting the big handouts? The government employees making those decisions (and leaving when the Bush administration ends) will be joining that industry when their government service ends. They stand to profit from handing out money to their future (or past) employers.

2) Why weren't the execs prepared for questions or at least the outline of a plan? That's basic business. If they weren't ready, how did they know that $25B was the right number? Congress was right to grill them; they should have grilled the other bailed out companies as well.

I don't agree that they'll repay the loans; it's more likely that the government will forgive those loans at some point in the future when things turn around.

I won't even ask where my handout is...

[PHIL]

Most of your article is accurate and unemotional, BUT how does any of this change the facts:
-Giving public funds to private business is illegal per the US Constitution
-Big Gov has no money to give away or "loan". The treasury is an empty cupboard.
-GM is gutless and will NEVER do the things it must to thrive. That is stand up to its worst enemies...Washington and the UAW.

[Art A Layman]

Excellent dissertation.

As much as the American populace has achieved more education, we have not moved far from the Salem witch trial paranoia.

If we had to depend on the cause and effect abilities of our populace, electricity would still be an enigma.

There is the looming question of whether $25B is all that is necessary. Simply telling the auto execs when the credit markets and the economy will turn around would enable an immediate answer.

Could it end up $100B or $200B? Very possibly. But it would still be cheaper than having the D3 fail.

Obama, employing political expediency, is calling for a plan before giving checks. Now this makes a lot of sense? To deliver an understandable, acceptable plan, they would all have to divulge proprietary strategies to each other and the world. Where does that get them?

My guess; they'll get the money, plan or no plan, after Obama is in the seat where the buck stops. He doesn't have a lot of choices. From a taxpayers perpective, you can make me pay now or you can make me pay later. Later will be far more painful.

[mark Brown in NJ]

Hey. I agree we need to save Detroit.
Detroit's big 3 need to survive. Long Live Detroit; however, The Automobile Industry is DEAD. Long live the TRANSPORTATION industry.

See MY blog post.
We need to give them loans, with a carrot to transform themselves into TRANSPORTATION companies.

here: http://sos-newdeal.blogspot.com/2008/11/next-prediction-save-car-companies.html
mark brown.

[Aleksandar M. Velkoski]

Is this really a "bailout" of the automotive industry? Or, is this a business loan that will be repaid to the government with interest (following the original Chrysler loan model)? What do we make of the $700 Billion provided to the financial industry? Was that not a "bailout?" Let's ask the following question: "will the financial industry pay back the $700 Billion bailout that they received (like the automotive industry will repay its $15 Billion loan)?" I think that the United States Government, the press, and the taxpayers need to rethink the way they discuss this issue.

I'm not taking a stand. Rather, I'm trying to generate some realistic and intellectual discussion. I understand the implications of the failure of the financial system. However, was AIG not a free market corporation? JP Morgan Chase? Bank of America? Where are the business plans and re-structuring plans for those organizations (whom are not even using the bailout funds they received to help free-up credit - the actual purpose of their bailout)? At the same time, what are the implications of the failure of the automotive industry? Which, mind you, employs how many people in the United States (and supports how many retirees)? We cannot extend a loan for $15 Billion to the automotive industry but can extend $700 Billion (or more) of taxpayer dollars to bailout the financial system? No questions asked? Something seems seriously wrong with this picture. Again, I'm not taking sides just trying to generate serious intellectual discussion.

The White House said today, "a precipitous collapse of this industry would have a severe impact on our economy,” and added, “it would be irresponsible to further weaken and destabilize our economy at this time." The White House seems to be correct. Do we really understand how interconnected the automotive industry is? How this could effect other large manufactures (including Toyota, Honda, and, more importantly, suppliers and professional services and support companies)? These are unprecedented times in the United States. As a conservative free-market advocate, I hold that we ALL need to take a second look what's going on here and what effect this will have on our lives and the nation. If you think you know it all, think again (and I include myself in that statement).

[mark Brown]

hey... take a look at my blog.

I agree that we need to save the AUTO companies.
over at my blog I say
1) save the JOBS and
2) Make the companies GREEN

1) http://sos-newdeal.blogspot.com/2008/12/auto-industry-rest-in-peace.html

2) http://sos-newdeal.blogspot.com/2008/02/proposal-transportation-and-energy.html

But the most important thing we need to do is;

FORCE the auto companies into a PRE-PACKAGED bankruptcy.
(the WARRANTY issue can very EASILY be taken care of the SAME way your TV is under warranty AN INSURANCE policy)
This pre packaged bankruptcy will last all of one day?

the stakeholders will agree to:
1) government taking over the medical needs of employees
2) Employess will give significant flexibility about health care costs.
3) Shareholders will agree to have government assume a large percentage of stock and ownership
4) DEALER networks (GM: example will go from 7,000 dealers in US to less then 1,000
5) new gm network called "GM", can sell any gm car in their NEWLY reduced line.
6) Newly trimmed companies will take the $$$ given by govenrment to retrain and retool to go into mass transit business.

7) dealers will also re-tool to become local installation/repair/maintenance groups to service the new rail lines

PS: This proposal is mostly from Feb 2008!