Saturday, November 15, 2008

Bailing Detroit

Of late I've found myself in agreement with conservatives such as David Brooks regarding a bailout for the US auto industry.

Brooks writes:
Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth.

Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. It crosses a line, a bright line. It is not about saving a system; there will still be cars made and sold in America. It is about saving politically powerful corporations. A Detroit bailout would set a precedent for every single politically connected corporation in America. There already is a long line of lobbyists bidding for federal money. If Detroit gets money, then everyone would have a case. After all, are the employees of Circuit City or the newspaper industry inferior to the employees of Chrysler?
As a business person, I believe that companies succeed and fail for a variety of reasons, some due to good or bad management, and some due to factors out of their control. And still there are reasons due to technological progress.  Buggy manufacturers didn't realize they were in the transportation business and lost out to automobile companies a hundred years ago. More recently, traditional map publishers are suffering because they were too late to the electronic mapping transition (internet and GPS). The leading mapping data company, Navteq, was just bought by Nokia for $8 billion, probably 100 times what Rand McNally is worth today. (And Rand McNally now gets much of its data from Navteq.)  When companies fail, employees and vendors are hurt. But eventually new companies grow and create new opportunities. Government should stay out.

I do not agree with Brooks' comparison to other industries however. The main reason being that there are many more players in each. The demise of any one or two companies will not bring an entire industry to its knees and have as wide-ranging an effect on other businesses that serve the failed company or its employees.

I did find this piece a compelling counter-argument to Brooks:
One reason for the casual support for letting GM fail is the assumption that bankruptcy would be no big deal: As USA Today editorialized recently, "Bankruptcy need not mean that the company disappears." But, while it's worked out that way for the airlines, among others, it's unlikely a GM business failure would play out in the same fashion. In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

That's why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation. The company would close its doors, immediately throwing more than 100,000 people out of work. And, according to experts, the damage would spread quickly. Automobile parts suppliers in the United States rely disproportionately on GM's business to stay afloat. If GM shut down, many if not all of the suppliers would soon follow. Without parts, Chrysler, Ford, and eventually foreign-owned factories in the United States would have to cease operations. From Toledo to Tuscaloosa, the nation's?assembly lines could go silent, sending a chill through their local economies as the idled workers stopped spending money.
I do agree it would be tragic for our economy if GM actually closed its doors and this explains why a bankruptcy filing might have that result. Yes, eventually foreign car companies would buy those plants and create new workforces, but it would take years. 

I'm certain that if not sooner than January 20th, the Obama administration and Congress will put together a bailout for GM and if necessary, Ford. I would just hope that stringest measures  would indeed be part of the package, such as:

Government can fire/hire top executives
Government gets stock warrants it can sell when the stock price recovers
(see Chrysler bailout)
Government owns the assets if the company does eventually fail

At the same time, I agree with taking steps to equalize the opportunities for import/export. If our exports are facing tariff or other limitations that we do not impose on imports, or inequalities due to environmental regulations etc., we should take steps to create fairness as well as incentives for more foreign-owned car companies to build plants here.

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Anonymous said...

Having lived in Michigan most of my life, being a kid of a GM family and having most of my friends the same, and having lived in Detroit for 20 years+ I speak with some knowledge. This mess has been predictable for GM and the rest for nearly 25 years. They refused to build small efficient cars and now are reaping the results. I would let them die out, but I hate seeing so many displaced and hurt financially. Once, a job at GM was all one needed. 30 years and out, with a great pension and health care. No more.

Cormac Brown said...

It's ridiculous for the CEOs to plead poverty before the House of Representatives, when the money that each one makes could keep a whole plant open for a year (Ford's CEO made 21.7 million dollars last alone).

Cormac Brown said...

BTW, Happy Thanksgiving!