Posts Tagged ‘gm’

Bondholders Are Not Villians

May 27, 2009

I’m tired of hearing about the evil bondholders that are preventing GM from avoiding bankruptcy.  Why not call them what they really are?  They are the creditors to GM.  They lent GM money, and now are being villified for wanting to collect as much of that money as possible.

The Obama administration’s “offer” is for the bondholders to trade their $27 billion in debt for 10% of the failing company.  If they go to bankruptcy, the bondholders might get wiped out completely, but in a real bankruptcy, the bondholders usually get paid back first.  The problem is that this is not an ordinary bankruptcy.  It is rigged to give the government and the unions all the power.  The creditors and stockholders are the ones getting screwed.

Also, the “offer” gives the US and Canadian governments a 69% stake in the company.  So the primary debt holders get 10%, but the government gets 69%?  Who in their right mind would accept this rotten deal?

We all know the problem with GM is that their labor costs are too high.  Rather than actually trying to fix the problem, the government is handing the keys to the car over to the unions.  Since they are in a partnership with Uncle Sam, we now will be bailing them out forever.  The current model is unsustainable, but rather than actually fixing the problem we are setting up for permanent transfer of wealth from our pockets to the unions.

So, instead of just saying “it’s the evil bondholders’ fault,” we need to look at the actual offer and realize the only winners are Obama and the UAW, and the losers are every tax paying citizen of the country.

A Great Example of the Free Market

January 11, 2009

This weekend, during the NFL Playoff games, I was bombarded with truck commercials from Toyota, Ford, Dodge and Chevy.  Each was touting their own features and downplaying those of their competitors, and all four talked about their great fuel economy.

This is a perfect example of the free market at work.  First, when Toyota came out with their new Tundra, and their new commercials (the see saw and braking ones, etc) the American automakers didn’t have an answer.  Now, they have all innovated to create new features to compete with the Tundra.

Secondly, when consumers demanded better fuel efficiency, the truck makers had to listen, and now all of these full size trucks are getting over 20 miles per gallon, highway, even with a V8.  The fact that they made these trucks so much more efficient so quickly shows how innovative the automakers can be.

The best part?  All of this was done without any sort of government intervention or mandates.  In order to sell their trucks, Toyota upped the ante with the Tundra and their marketing campaign, and the American companies countered with their own new features.  Then when oil and gas shot through the roof, they innovated again to make their trucks more efficient.  It was purely a function of the free market and competition.  Capitalism at it’s best.

I know this is only a small anectdote for economics, but it shows that we don’t need government to tell us what to do in order to make things better.  Lately we have been conditioned to think we need government intervention, and we just lack the vision to see when the free markets really work.  It also shows what happens when consumers demand a better product.  When more people bought Tundras, Ford, Chevy and Dodge all upped their efforts.

Imagine if we can get this kind of action in our healthcare industry.  Our costs would plummet and our care would improve.  Instead, with government’s heavy involvement, healthcare is one of the only industries where technology makes things more expensive.  You’d also be hard pressed to find people that are totally satisfied with their healthcare as well.  However, we are so tied to the current system that a consumer revolt is almost impossible.  If government would get out of the way, maybe there would be a chance of true reform, not little tweaks to a horribly broken system.

The lesson is that the government doesn’t always know best, and that we need to let the markets work.  Have you ever read the CAFE fuel standards?  It is the most idiotic way to measure fuel efficiency ever.  So, rather than make each model more efficient, they could just sell crappy, compact cars.  Now, that consumers have demanded better fuel efficiency in trucks, the companies have listened.

We need to carry this model over to every aspect of our economy.  Only then will we be able to weed out the failures and move forward in the new industries that are arising today.  We need government to stop propping up businesses and getting involved in industries they don’t understand.  Let the companies work and the consumers dictate what they want and we’ll all be better off!

Big Three Bailout is Doomed

December 9, 2008

After many false starts, the White House and Democrats have come to a deal on the Bailout of the Big Three.  Among the provisions is the creation of a “Car Czar” to monitor how and where the automakers spend their bailout bucks and requirements for the companies and the UAW to come up with a plan for profitability by March.

On the surface, it sounds good, but this plan is doomed from the start, and will be a huge waste of fifteen billion taxpayer dollars.  The reason is simple:  The plan does not address any of the issues that got the automakers in trouble in the first place.

Making cars is not a very profitable business.  Toyota makes about $2,000 for each car they sell.  GM loses a couple hundred dollars, and Ford loses close to $2,000.  Those numbers are from a few years ago, but as you can see, even the most profitable company only makes a $2,000 per car.  When you multiply the profit over millions of cars sold, you get a huge number, but if you add costs anywhere along the line, it could wipe out a huge chunk of the company’s profits.

One cost that hurts the automakers is their cost of labor.  Total labor compensation for GM is around $78 per hour, while Toyota’s is around $48.  A big reason for this is funding the pensions and healthcare costs of retired UAW workers.  Also, negotiated programs like the “jobs bank” hurt the automakers.  The jobs bank requires that when a plant is not producing vehicles due to lack of demand, the workers still get paid up to 90% of their salaries.  GM spend about $1,500 per vehicle on these costs.  That’s almost the gap between them and Toyota.

While this bailout may call for talks between the Big Three and the UAW, it doesn’t look at the big picture, one that does not include a union at all.  Maybe that has to be part of the equation.  Do they really need to be unionized?  Toyota’s workforce is not unionized, and while there are some complaints, most workers seem to be content.  Of course, this option will never come up, but if we were really serious about fixing the automakers, this would have to at least be discussed.

The “Car Czar” is supposed to oversee how the companies will operate and approve almost all spending of the bailout dollars to make sure it is being spent domestically.  If you really wanted the Big Three to emerge as a profitable company, you should allow them to explore all options.  If they can find a cheaper way to produce vehicles or parts in Mexico, they should be able to.  There is an advantage to assembling cars with the skilled workers of the United States, why else would Toyota, Honda, Nissan and BMW do this?  So allowing them to explore all options will not kill U.S. jobs.  This is another reason why this bailout will not solve anything.

Also, part of the bailout is that the automakers have to show they will put the money towards more fuel efficient compact cars.  The Big Three makes their money selling trucks and SUVs.  They lose money building compact cars that can’t compete with the market niche the Japanes cars have.  Why can’t they develop more efficient trucks?  They might not be 50 mile a gallon Smart Cars, but they would do just as much to end our dependence on oil.  Again, if this really was about reforming the business of the automakers, we wouldn’t place ridiculous requirements on them.

Finally, the government needs to look at itself as part of the problem.  You would think that fuel efficiency would be easy to regulate, right?  Read this article on the Corporate Average Fuel Economy from Wikipedia.  Could this more convulted?  What the heck is a “harmonic mean?”  Can anyone in Congress actually figure this out?  This is an antiquated piece of legislation from the days of the oil embargos of the 1970’s that is still in place.  Before Congress puts any requirements on automakers, they need to repeal this stupid law.

The fact that the entire fleet of cars sold has to meet some requirement is absolutely ludicrous.  If Ford sells a million trucks, they then must sell millions of crappy, poorly designed, cheap compact cars to reach their fuel efficiency requirements?  The goal should be to increase the efficiency of that one model of truck.  Instead, they could make the truck less efficient and make the crappy car more efficient.  Overall, the “harmonic mean” stays the same.  The CAFE standards are completely ineffective, do not do what they were intended to do, and force the Big Three to sell cars that aren’t profitable.

Overall, the Big Three Bailout will only lead to more of the same and even more taxpayer dollars wasted.  They need to think outside the box and look at the bigger picture.  Instead, there will be small reforms that will be billed as big ones and in a few months, they’ll be back for more money.  If we really want Ford, GM and Chrysler to survive, we need to allow them to operate as free enterprises and not companies with their hands tied behind their backs.  Until we really look at the problems, any help for the Big Three is doomed before it even starts.

The Auto Industry – What are the Problems?

November 17, 2008

I’ve read many articles over the past few days regarding the impending auto industry bailout, and I have not read one that really discusses the problems with the industry itself.  Obviously, something is inherently wrong when the Big Three are always teetering on the brink of bankruptcy.

Of course, there are macroeconomic issues that are effecting everybody.  These are issues that are basically out of our control, which include the credit crisis, foreclosures, and the entire recessionary environment.  Everyone is facing tough times.  Why shouldn’t every small business get a sizeable bailout then as well?  Macro issues are not the reason for the constant struggles of the auto industry.

I’m tired of hearing politicians talk only about bailouts.  What about some of the regulations that are crippling the automakers?  Or the years of laws that were basically handouts to the Big Three?  We need to find the real problems, not just put $25 billion bandaids on them.

If we are going to bailout the Big Three, we need to have a pre-arranged bankruptcy deal with the government.  Let the Fed pay for all the outstanding debt these companies have.  During this time, Congress should look at every piece of legislation that has to do with the auto industry.  The UAW will have to make concessions as well.  Let the automakers shift some of the production to Mexico so they can actually make a profit, while the higher paying assembly jobs stay here in the US.  Make the UAW have to pay for health insurance like most workers do and make them fund their own retirement accounts.

While this will still cost the taxpayers money, it will help the Big Three emerge from bankruptcy on the same footing as the Asian and European automakers that assemble cars here in the US.  With less costs and more freedom to allocate production where it will be the most profitable and most efficient, they can focus more on innovation and research and development.

A bailout will just prolong the problems the Big Three are facing and nothing guarantees that this will help at all.  If they need $25 billion to get through December, will they need $25 billion more to get through January?  What if new car sales don’t pick up for a year?  We have no idea if this money will help at all.