Nick Fickling: Chapter 11 better for automakers
Vail, CO, Colorado
As I headed over Vail Pass to get my Ford Freestyle serviced, I mused about the much-discussed auto industry bailout and an e-mail from a disgruntled reader who objected to my comment last week that Chapter 11 was more appropriate for GM and Chrysler than a bailout.
There were supportive e-mails but that pro-bailout e-mail questioning my take on things really had me going, for I have always appreciated those who question my thinking.
Humor me while I address the points he made:
“The fate of our nation’s economic survival is at stake.”
Surely this is hyperbole? The demise of Detroit will cause a great deal of suffering to a great many people, but is the U.S. economy really more threatened by bankruptcy proceedings rather than extreme government intervention? President Bush is wise to consider a managed Chapter 11 solution over a bureaucratic bailout.
“The U/S. Detroit auto industry is really in good shape with the GM Malibu and the Ford Fusion.”
If those cars are really as good as touted, then GM and Ford will benefit from Chapter 11 and emerge strong enough to compete with Toyota, Honda, Nissan et al. If the government steps in with a bailout, the unions will not be forced to accept reality in the same way they would were Chapter 11 filed.
“GM outsells Toyota, and Ford outsells Honda and Nissan.”
That may be true, but does that mean they are making better cars that people want? I would suggest that GM, Chrysler and Ford are only managing to sell their products by giving such big incentives and cash-back deals that they lose thousands on every car sold.
They are trying to turn their businesses around, but I fear they delayed changes to their philosophy of “marketing existing inventory rather than producing products people want” until too late.
I bought my Ford because it was with an interest-free loan over five years, and had a $1,000 cash-back rebate and other incentives. I am happy with the car but would have gone with a Toyota had the financial incentives not been there.
Ford almost certainly lost money on my Freestyle and no company can survive for long if its products are sold at a loss! Ford, GM and Chrysler are currently unable to offer low-interest or interest-free loans because credit has tightened.
Even with a $14 billion infusion, Detroit automakers are unlikely to sell more cars unless they can keep offering the financial incentives. I, as a taxpayer, object strenuously to my tax dollars being used to provide cash-back incentives in order to facilitate sales.
“Who foots the bill for health care, unemployment, loss of tax base and forgiven debt if GM, Ford, or Chrysler file Chapter 11?”
This is a moot point given the size of the closures and cuts that have already been announced even if a bailout occurs. Besides, if the taxpayer is going to bear the burden one way or the other, I would prefer to have the industry right itself once and for all.
“Surely a bailout would just balance the incentives given to get foreign companies to build or assemble cars in the U.S.”
I would ask whether an American worker with an American company importing a large proportion of its auto parts is any better for the U.S. economy than an American worker with a foreign company assembling imported auto parts, particularly when the foreign company makes a profit and pays tax and the U.S. company doesn’t?
Why is a very public bailout, with death by a thousand cuts, preferable to Chapter 11? I do not understand why Chapter 11 would be so bad given that the bailout alternative is as public as Chapter 11, does not include any of the protections that Chapter 11 provides, and also will involve a government car tsar whose very presence in the process can only lead to less flexibility and less clear management processes.
Like President Bush, I am not convinced that our money would be well spent on a bailout of the big three. I hope that President-elect Obama quickly comes to a similar conclusion.
Nick Fickling is retired from the British military and lives in the Vail Valley. You can reach him at firstname.lastname@example.org