Auto Industry : The \" big three\" auto manufactures in the US were in financial
ID: 1254494 • Letter: A
Question
Auto Industry:
The " big three" auto manufactures in the US were in financial trouble, with both General motors and Chrysler filling for bankruptcy and significantly downsizing. Chsysler being taken over by Italian car maker Fiat, and GM ceding majority ownership to the U.S goverment in return for over $20 billion in bailout money
1) why do you think the U.S auto industry was in financial trouble, especially compared to its foreign competition ?
2) What do you think will be the economic consequences of a goverment bailout of the auto industry ?
3) Do you believe the goverment should assist the auto industry ? if so, why and what way should they assist ? if not, why not ?
4) The industry is an oligopoly in manufacturing but monopolistic on the store level . Does the fact that the industry is an oligopoly affect your opinion regarding a potential bailout ? why or why not ? How might your answer differ if the auto industry was a monopoly or monopolistically competitive ?
Explanation / Answer
This question seems a little dated, since the auto bailout in the States occurred over a year ago, but in regards to American auto companies being in financial trouble versus foreign ones, it's not necessarily true that foreign auto companies (like Toyota) are not in trouble. Most people would claim that American auto makers have to deal with unions that force them to pay rather large salaries for skilled labor and provide overly generous pensions and health benefits to workers. While a company should not abuse his labor force, the unions have taken benefits too far when it comes to the auto industry. I'm from Flint, Michigan, which used to be a major hub for GM. When I was growing up, there was a Buick plant that employed 20,000 people, and that was just one of the GM plants in our city. However, when people started to retire at fairly young ages (mid-50s and early 60s), they began collecting pensions and enjoying the best health and dental benefits in the nation. As more and more auto workers retired and car sales fell, the company couldn't simply afford to pay for all the "promises" they had negotiated with the unions. Instead of being willing to negotiate so that more plants could stay open and employ more people, the unions essentially forced the financial downfall of some of the auto makers. One other cause for the problems of American auto companies is their refusal to eliminate lines and streamline their production. GM has done this, but only after the government got involved. Ford did this several years ago, and they did not need or ask for government assistance. I don't think that the government should have stepped in in this case. By stepping in, they forced GM and Chrysler to close down thousands of dealerships across the nation, costing many non-union Americans their jobs. The closures were not necessarily based on the success of a dealership--I've seen this in my hometown especially, where some of the busiest and most productive dealerships were closed by GM. Additionally, Ford was in similar financial trouble several years ago, fixed the problems without government help, and they're doing better today than GM and Chrysler. Finally, if America's economy is truly a free enterprise, then we must allow businesses to fail. It's not the end of the world, and sometimes it provides motivation for a company to self-correct. A good example of this is Charter Communications. They declared bankruptcy a little over a year ago, but restructured themselves, and now they have better customer service than they did before and more satisfied customers. Over in the real economy, perhaps the biggest story is the impending and highly likely merger of GM and Chrysler, in which GM would swap its 49% stake in GMAC, its consumer finance company, to Cerberus (which owns the other 51%), in exchange for Chrysler, which is currently owned by Cerberus. It seems that the deal may hinge on financial assistance from the government, at least according to six governors attempting to pressure the dynamic duo of Paulson and Bernanke to help out. Until Thursday, GM was seeking $10 billion from the Treasury Department’s $700 billion bailout fund – yes, the same one that has been used to recapitalize banks – but Paulson’s preference is that GM tap a $25 billion low-interest loan program set up by the Energy Department in September. It’s easy to argue for bailing out the auto industry, with its hundreds of thousands of factory workers, as opposed to the financial sector and its Wall Street bonus babies. (It’s less easy to argue for bailing out Cerberus, which is a private equity firm.) But I want to point out one difference. The business of a bank is borrowing and lending money. Banks currently face two problems. The first is a crisis of confidence: people who lent them money aren’t sure they will get it back, because no bank – no matter how sound – could pay back all its creditors at once. (The whole point of a bank is to borrow short and lend long.) If this were the only problem, government deposit insurance and the new loan guarantees would take care of it, and the banks would be fine. The second problem is a potential solvency crisis: it’s possible that banks’ assets have declined in value to the point where they are worse less than, or not much more than, their liabilities. The answer here is recapitalization: giving the banks more capital, in exchange for ownership shares. If you give banks enough capital to offset the losses on their assets, there’s no general reason to believe they can’t go forward and make profitable loans, especially with the cost of money as low as it is. They don’t have to do anything particularly intelligent or risky with the money; it’s just to compensate for past mistakes. If you do have a reason to believe that a specific bank will not have a viable business in the future (for example, its whole business was subprime lending), you don’t recapitalize it – and we know that Paulson has been turning at least some banks down. The auto business, like most businesses, is more complicated. You have to design and manufacture cars that people want, and for which people will pay more than they cost to manufacture. You have huge investments in fixed assets (factories that can’t be easily converted to new uses), technologies (hybrid engines, or the lack thereof), and human capital that constrain your ability to develop new products and offer them at competitive prices. In this kind of business, it’s possible that no amount of cash will make a company viable going forward. GM is currently losing about $1 billion of cash per month, according to analyst estimates. If you loan GM $10 billion (or make a $10 billion capital injection), and nothing else changes, all that means is GM survives for 10 months longer before everyone gets laid off. The $10 billion loan only makes sense if that money, or those extra 10 months, will enable GM to somehow become a profitable company on a going-forward basis. This is a different kind of question than you have to ask about a bank before recapitalizing it. Bank of America and JPMorgan may need more capital in the future to compensate for the deterioration of their past loans, but few people expect that they won’t be able to make money in the future. With GM, there is a real question as to whether it can become a profitable company at all. The story is they just need to buy time until the Chevrolet Volt comes out, but there’s not a lot of evidence that by the time it does, it will be competitive with whatever Toyota and Honda have engineered by then. I’m no expert on GM, so I’ll leave it there. It’s possible that GM is on the brink of a turnaround and it just needs $10 billion more in loans. I really hope that’s true. (And in any case, the Energy Department has already allocated $25 billion in low-interest loans for US auto manufacturers.) The point I want to emphasize is that the criteria to use in deciding whether to bail out GM are different than the ones to use in evaluating banks – and have nothing to do with which one we have warm and fuzzy feelings about. US auto industry is like a dying person on a life support and it is not worth to be saved. Here are the reasons: a) Big 3 had all the opportunity to make progress in order to compete with Jananess, Korean, German auto companies, but they all choosed not to do so because of their greedy and power thirsty management b) Big 3 had all the time to stop playing internal politics and to improve their management team, but they all choosed not to due to their near sight c) Big 3 had all the opportunity to work out a deal with UAW to resolve the labor issue and to reduce manufacturing cost, but they all refused to do so d) On the other side, the greedy UAW, with totally outdated skills, has been demanding more and more pay and benefits with lower productivity and quality in return, has never thought about the future of US auto industry and has refused to observe how the other group of American auto workers have been working in foreign car companies nearby with good beneifts, job security, high quality products. The bottom line: US auto industry has been corrupted from top to bottom and management to UAW. It will be far much better off to let them file chapter 11 if they still want to come back. Any bailout money spent on US auto companies is a big waste of American taxpayers' money. I believe the United States government should not help the automotive industry and here is why; 1) The government just spent $700 Billion Dollars to bail out financial companies throughout the United States and many American Taxpayers were against this bailout. 2) Have automotive companies stop corporate sponsoring. This mean they sell the naming rights to stadiums and arena such as Ford Field (Detroit) and the General Motors Place (Vancouver). Automotive companies could even find another sponsor for sporting events such as NASCAR, the PGA and LPGA, and the NFL. Automotive companies can even stop sponsoring television events as well. After all, if automobile companies want to save money instead of asking the government for assistance, they could start by ending corporate sponsoring of events and sporting facilities. phew!!!hope it helped...
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