There has been so much drama over the last 2 weeks focusing on Detroit. GM, Chrysler and Ford (or the Big 3) wants a government bailout (heck why not, everyone else on Wall Street is getting free money for screwing up) but no agreement has been reached so far. The democrats flew to Detroit, headed by Pelosi, and met the big guns and promised them a bailout. The big three came back to Washington and in their private jets (what were they thinking) and asked for a 25 Billion package and said Bankruptcy was not an option for them. Then the lame duck congress rebuffed them and now the democrats have given them until 2 Dec to submit a viable turnaround plan so assistance can be given to them. Phew!!
I guess in this economy it is all but boiling down to consumer confidence. And make no mistake, it will get worse and fear has already taken over the entire country. But giving the auto industry a bailout does not solve anything. Assistance of some, shape or form will probably be worked out by the new administration, but my point is nothing is going to change until the American auto industry fundamentally changes its current practices. GM, Ford and Chrysler may ultimately receive loans or other financial support from the U.S. government, although the form, timing, and magnitude of this assistance are difficult to predict. The govt will probably give billions without knowing what it is getting into (read AIG, after announcing a $85 billion bailout, the govt increased it to $140 billion and still no one knows what’s going on there). Anyways, it is important to stress that such assistance will only buy more time for these companies rather than as a solution to their fundamental business risks, which will remain no matter how much money they are given.
If any bailout is given, there should be a lot of strings attached. First, Detroit’s huge disadvantage in costs relative to foreign brands must be eliminated. There needs to be a fundamental shift in the cost burden weighing down the industry and the cumbersome contracts with UAW that make work rules a constant challenge. The American car companies are unable to compete as they are not able to align pay and benefits to those of competitors like Honda, Nissan and Toyota. Also, the existing management must be shown the door. None of the CEO's want to step down and take responsibility but all of them want a free pass (read tax payer's money). Rick Wagoner has been the CEO for the last 8 years at GM and he literally has nothing to show for it. I wonder what change he is going to bring once he gets our money. If he was going to bring the change he is promising, GM would not be begging for assistance. Robert Nardelli who heads Chrysler took a $210 million package from Home Depot last year and landed this job. Wonder what real incentive he has to bring about any change. Alan Mullaly, CEO of Ford, has indiscriminately fired his workforce in the name of cutting costs and Ford literally has no one left to bring about any change no matter how much money they receive. The stakes are high. The Detroit automakers employ nearly a quarter-million workers, and more than 730,000 other workers produce materials and parts that go into cars. About 1 million more people work in dealerships nationwide. They burned through nearly $18 billion in cash reserves during the last quarter - about $7 billion at GM, almost $8 billion at Ford and $3 billion at Chrysler. GM and Chrysler have said they could collapse in weeks. So no two ways about it in my opinion. The existing management has to be fired if any meaningful turnaround is to be achieved in the Auto Industry.
There is another interesting question which the big three are asking to make a case for their bailout stating that Consumers will not buy cars from a bankrupt company. But at this point they have all accepted that they are burning through cash at an alarming rate and GM has publicly stated it may not survive for long as it has no liquidity. Interestingly, while all of them want money, none of them have anything to say explaining how the money will be spent. Though it is a tough decision, filing for Chapter 11 and/or an organized bankruptcy may give them the best chance of re-structuring and re-negotiating existing thorns and ultimately re-emerging as a stronger player.
I guess in this economy it is all but boiling down to consumer confidence. And make no mistake, it will get worse and fear has already taken over the entire country. But giving the auto industry a bailout does not solve anything. Assistance of some, shape or form will probably be worked out by the new administration, but my point is nothing is going to change until the American auto industry fundamentally changes its current practices. GM, Ford and Chrysler may ultimately receive loans or other financial support from the U.S. government, although the form, timing, and magnitude of this assistance are difficult to predict. The govt will probably give billions without knowing what it is getting into (read AIG, after announcing a $85 billion bailout, the govt increased it to $140 billion and still no one knows what’s going on there). Anyways, it is important to stress that such assistance will only buy more time for these companies rather than as a solution to their fundamental business risks, which will remain no matter how much money they are given.
If any bailout is given, there should be a lot of strings attached. First, Detroit’s huge disadvantage in costs relative to foreign brands must be eliminated. There needs to be a fundamental shift in the cost burden weighing down the industry and the cumbersome contracts with UAW that make work rules a constant challenge. The American car companies are unable to compete as they are not able to align pay and benefits to those of competitors like Honda, Nissan and Toyota. Also, the existing management must be shown the door. None of the CEO's want to step down and take responsibility but all of them want a free pass (read tax payer's money). Rick Wagoner has been the CEO for the last 8 years at GM and he literally has nothing to show for it. I wonder what change he is going to bring once he gets our money. If he was going to bring the change he is promising, GM would not be begging for assistance. Robert Nardelli who heads Chrysler took a $210 million package from Home Depot last year and landed this job. Wonder what real incentive he has to bring about any change. Alan Mullaly, CEO of Ford, has indiscriminately fired his workforce in the name of cutting costs and Ford literally has no one left to bring about any change no matter how much money they receive. The stakes are high. The Detroit automakers employ nearly a quarter-million workers, and more than 730,000 other workers produce materials and parts that go into cars. About 1 million more people work in dealerships nationwide. They burned through nearly $18 billion in cash reserves during the last quarter - about $7 billion at GM, almost $8 billion at Ford and $3 billion at Chrysler. GM and Chrysler have said they could collapse in weeks. So no two ways about it in my opinion. The existing management has to be fired if any meaningful turnaround is to be achieved in the Auto Industry.
There is another interesting question which the big three are asking to make a case for their bailout stating that Consumers will not buy cars from a bankrupt company. But at this point they have all accepted that they are burning through cash at an alarming rate and GM has publicly stated it may not survive for long as it has no liquidity. Interestingly, while all of them want money, none of them have anything to say explaining how the money will be spent. Though it is a tough decision, filing for Chapter 11 and/or an organized bankruptcy may give them the best chance of re-structuring and re-negotiating existing thorns and ultimately re-emerging as a stronger player.
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