"It is the common fate of the indolent to see their rights become a prey to the active. The condition upon which God hath given liberty to man is eternal vigilance; which condition if he break, servitude is at once the consequence of his crime and the punishment of his guilt." -- JP Curran, 1790

Tuesday, November 18, 2008

Let the Detroit 3 go Chapter 11, ASAP!!

The final test for this "lame duck" congress comes this week with the push to bailout the Big 3 U.S. auto-makers (GM, Ford, and Chrysler). I urge those in congress to vote NO.

The Democratic leadership is pushing to appropriate $25B of the approved $700B bailout for these auto-makers. It is not a bailout for the auto-makers but rather a Christmas present for the United Auto Workers (UAW) union. $25B will cover roughly 4-5 months of operating expenses and will not change their unprofitable ways. In Spring they will be back with their hands out or worse, fail regardless of the bailout and/or layoff many of its workers.

The GOP congress and President Bush have offered a compromise position, re-purpose the already approved $25B from moneys allocated to re-tool and development of hybrid vehicles into a no strings attached loan. Democrats have turned this down, and I say don't offer that up either. At most offer an extension of unemployment benefits and re-training credits to the workers if they are laid off as part of any Chapter 11 filing or actions.

The U.S. auto-makers have a defunct business model which has been propped up by their lobbying efforts. They are paying almost double in overhead operating cost per worker than the "foreign" owned auto-makers operating in the South. Their concessions to the UAW in the 1950s forward have sealed their fate.

They need to fail and go into Chapter 11 bankruptcy. That will allow them to re-negotiate union contracts, restructure, sell off failing brands, and change Management. This is what they need. For some reason people think that this will be the end of U.S. made vehicles. WRONG!

Just as the failing airlines had to go through Chapter 11 restructuring, the auto-makers need to do the same. Cars will still be built and warrantied, just as flights continued to fly. Union contracts need to be re-negotiated or eliminated. Using Northwest as a comparison, it went into Chapter 11 and was able to replace its mechanics union, restructure pilot and flight attendant union contracts, create a new fleet strategy, and revamp its routes for cost efficiency. The Big 3 need this same help.

They have tried to vertically and horizontally integrate to invoke "economies of scale" as a business model. But it is a method not a model. They have become to big to handle and change. They cannot innovate rapidly enough because changes are so grand that the only investments that generate positive ROI are the proven existing technologies. To change to a electric hybrid vehicle, they can't simply retool manufacturing. They have to retool the mfg. lines, develop the product, re-engineer the vehicles, source within their own supplier, develop distribution models for the supply chain, not to mention marketing and sales overhead. Oh, and not just for one brand or style of vehicle, but since manufacturing lines have been so inter-woven, the change will need to happen across multiple brands and or vehicles.

They have over supplied the market with cars and therefore people can't afford the prices they need to be profitable given their operating costs. Their perceptions of the demand curve are not in-line with the reality. Demand is lower than the supply they need to be profitable. Demand will drop in this economy. You can't incentivize your way to profitability. Part of the bailout is a $7,500 incentive for buyers of electric hybrids like the brainchild Chevy Volt. Congress is essentially interpreting that demand will not meet the supply curve. Think of it this way, the taxes you pay will help your neighbor buy a new car! Hope you get a ride!

Demand will not go away! There will be a demand for new cars, domestic and foreign made. Sure the foreign owned auto-makers will probably see a market share bump because of this, but there won't not be a U.S. owned auto-maker. They will breakup the conglomerates and form new partnership and establish new profitable business models.

For the companies who supply the Big 3, they will still need your products. Orders may be down and you will have to look at new companies to supply, but if you have the right product at the right price, you will recover.

Regarding the calls that we bailed out the Financial Institutions and Banks; new automobiles are a luxury, credit is essential to market operations. Like the Steel Industries in the 80s, let them roll and re-emerge as a more efficient and profitable industry.

I wonder if G. Richard Wagoner, Jr., Alan Mulally, William Clay Ford Jr., and Robert L. Nardelli are secretly wishing for Chapter 11 so they can finally loosen the iron grip of the UAW.

Signing off...JCB

Update: Romney echoes the needs for the Big 3 to restructure and how the bailout prevents that: http://www.nytimes.com/2008/11/19/opinion/19romney.html?_r=1&hp Sphere: Related Content

1 comment:

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