The Big Three (or Two, or One)

Suppose the government “allows” one of Detroit’s big automakers to fail — and at this point, it might happen, as it is still not clear Congress will pass a rescue plan.

What happens next?

GM appears to be the first in line to fall.

GM burned through $6.9 billion during the third quarter, leaving it with only $16 billion on hand as of Sept. 30. But it needs $11 billion to $14 billion to continue normal operations.

The basic bailout scenario is this: The government provides a large sum of cash to keep the companies afloat long enough for savings from renegotiated autoworkers contracts to kick in and slumping sales to rebound. Only one of those is a sure thing. (The NYTimes’ story on the failed bailout of British automaker Leyland is also worth a read for some historical context.)

The prospects aren’t good for an automaker that heads into Chapter 11 bankruptcy. Would you buy a new car from a company that had publicly declared its insolvency? Then again, who’s buying cars from the Big Three when they’ve put their collective hands out and declared the virtual inevitability of their bottom lines bottoming out?

The CEOs of GM, Chrysler and Ford have been making a case that the auto industry is the linchpin of the American economy, and without a quick cash infusion, mass financial ruin is just beyond the horizon. For millions, it’s a devastating scenario.

Nearly 2 million Americans get their health insurance directly from one of the Big Three automakers. Most of them would lose that coverage if their company goes out of business. A failure of one of the Big Three could also cause a string of bankruptcies among suppliers.

The Center for Automotive Research, a Michigan think tank that supports the bailout, estimates that between 1.4 million and 1.7 million jobs indirectly tied to the Big Three would be lost in the first year following widespread auto failures.

The question that many ask is — how do you turn around a company in three months when it has lost $20 billion already this year?

So, let’s suppose the Big Three’s biggest battle now is ostensibly for the hearts and wallets of the American consumer. My perception of my (loosely defined) generation — I’m 24 — is that for the most part, what loyalty is left in our bunch is to whatever car is going to get us where we need to go.

I’m a two-time Honda Accord driver — one passed down from my parents and one purchased used with cash. If I had to buy a vehicle today, I would be more inclined to purchase a Honda as both vehicles have made it past 200,000 miles, with the current one pushing 250,000, but I’m not wedded to the brand.

So, do the Feds prop up the Big Three, or should they let the companies run their course and deal with the fallout? And would you buy a car called Ka?

  • Alison

    I believe the News Cut vote for or against the $700 bailout plan had about the same results as the current 80% against/20% for.

  • David W.

    The last thing the economy needs right now is a million newly unemployed workers, so some kind of loan is a must to at least get U.S. automakers through this quarter. Telling Detroit to drop dead may appeal to one’s sense of outrage, but it’s not a sensible thing to do really.

    FWIW, I got 300,000 miles out of my 1994 Ford Escort and over 200,000 on the wife’s 1998 Plymouth minivan. U.S. auto quality may not be as good as the Japanese, but the difference isn’t far less than it used to be.

  • AAG

    Let them fail? That is the question? They’ve already failed or we wouldn’t be considering it in the first place! And what’s with GM? They need $11-14 billion? That very same article says they HAVE $16 billion! I fail to see where they’re going to come up short if those are their numbers.

    The only thing that’s going to fail is us, twice, if we bail them out.

  • David W.

    Er, make that “is far less”. We still own the 1998 Plymouth too, BTW.

  • bsimon

    I’m coming around to the ‘let them fail’ position. If one auto company fails, it won’t disappear, it will be dismantled and sold off. For instance, I see today that Ford is selling a piece of its stake in Mazda. Perhaps GM will similarly have to divest itself of underperforming divisions and/or facilities that another organization can utilize more effectively. Also, if one company, say GM, goes under, that creates a huge opportunity for Ford & Chrysler to survive.

  • Andy Ferron

    News Cut’s readership seems to be decidedly anti-bailout.

    Sometimes, the economy has to correct itself…we need to find equilibrium again and unfortunately, it’s going to affect the people who don’t deserve it. No economic system is perfect.

  • http://minnesota.publicradio.org/collections/special/columns/news_cut/ Than Tibbetts

    @Alison, I just went back and checked:

    Do you approve of the government’s bailout plans?

    No – 85%

    Yes – 3%

    I don’t know – 11%

    @AAG, Perhaps a better context is fail = bankruptcy.

    @bisimon, …and it’s insane how little of an impact those sales might make: “GM said it would raise about $230 million — three to seven days‘ worth of cash — by selling its stake in Suzuki…”

  • http://northrockpub.com chris dohman

    the big three are far too big. giving them $ would do nothing but prolong the problems. I have no faith in the big three and that they will change to a business model that works. unfortunately i think failing is the only thing that might lead to something that works in the end. they need to focus on a small number of models that sell. they need to slash their many different brands, lines and models and sell off what else they can.

    for the employees that lose out i would support helping them with unemployment. i would also support creating jobs in companies with a new approach, electric vehicles and companies that propel energy independence.

  • boB from WA

    What about letting the semi-big 3 declare bankruptcy so that they can reorganize (like getting out from excessive labor costs, slash bulky middle management, renegotiate supplier contracts, etc), and then use the 25 Billion to help keep the credit flowing when they will really need it?

    One other aspect which has not been mentioned in this forum , is the possibility of increased sales to countries like India, and China. Or is the competition form the other manufacturers to great a burden to overcome?

  • jess

    I am against “bailing out” any of the Big Three auto makers. I don’t see how throwing money at this problem (a broken system) will help solve the problem. It seems that maybe the Big Three need to come up with a new business model; the current one obviously isn’t working.

    I understand the repercussions of “letting” them fail (the job loss, health insurance, etc.), however, it’s not the U.S. taxpayers fault. Maybe I can get in on this wave of bailouts and I can find someone to bail me out of my student loans…that would be great.

    Side note: I drive a Toyota Yaris which is my second Toyota; the first being a 1991 Camry that still was going strong when I got rid of it at just under 300,000 miles. I’ll stick with Toyota in the future, my only other consideration is a Honda.

  • kj

    I would need additional information before I could make an informed decision on if I am for or against the ‘bailout’.

    I personally feel that if a business can not support itself it should be allowed to fail and the market should regulate most businesses. With that said though, there are special circumstances that need to be considered.

    One of the major concerns of not bailing out the industry is that in an already fragile economy, the additional crush of unemployment and bankruptcies that would fall out of these company’s failure might drive the economy further into recession. Even if this only props the American auto industry up for a little while, it may let the economy recover enough to take another hit.

    Second, areas that are not even related to the auto industry will take a hit. Of course all of the supply chain industries will need to scramble to stay in business, but you will also have the industries that are being supported by them taking a hit. If we now have more uninsured people, the medical industry will get hurt with less patients that can pay. For me to support either way, I need to know what the depth of this ripple effect will likely be.

    I am not making a case for or against a bailout. I am just saying that we need to start asking some questions and getting the answers before we open our wallets.

  • JSmith

    I didn’t vote in the poll, but I’m in favor of the bailout as long as the government then gets some stake in the company (stock) and can direct reorganization until such a time as the companies are self-solvent.

    I also would recommend that the companies be made to sell of multiple assets as spin-off some of their different brands as entirely separate companies.

    I also want some guarantee that people either a) won’t lose their jobs in the process, and b) if they have no other choice but unemployment they are transitioned smoothly into benefits and able to have immediate access to placement at other facilities within their skill set.

  • JSmith

    Also interesting to think about (as I did just now) is how much market share these companies have. Companies shouldn’t get to the point of being “too big to fail”, because at that point you start effecting potential competition. Just because they have competition from outside markets doesn’t mean that it’s appropriate for them (the “Big Three”) to be the sole market for car manufacturing in the United States.

  • Jenn

    I struggle to see the ‘way out’ with either option.

    How will either A or B increase sales of cars? People with cash are not confident enough to spend it right now, and those with little cash may not have the credit.

    Electric, Hybrid, Suburban…. Doesn’t matter, as I won’t be buying ANY CAR in this economy. If my toyota solera implodes, I will have to learn to drive my fiance’s manual vw, or start working from home. He takes the bus, but I do not have that option.

  • bigalmn

    Why not compromise and offer the automakers financing for the cars they sell to dealers and to the public. Then there is available financing and people can buy cars they choose and then if they do not buy American then let the automakers go into bankruptcy. Don’t let them fail for lack of financing for their car sales which seems to be the case at this time.

  • Joey

    If we are going to bail out any or all of the auto makers we must require them to meet their obligations to prior employees and manufacture, not just assemble, cars in america, by requiring to bring the jobs back that they shipped overseas. This means that the parts they use to assemble cars are made here, by employers that pay a quality wage and benefits that include quality health insurance. We must require them to cut the fat, eliminate coporate bonuses until all loans are repayed in full and be open to have their entire business plan reviewed and restructured by outside regulators. In other words, we will loan you the money as long you agree to let us tell how to spend it

  • Andy Ferron

    Giving the government a stake in three broken conglomerates in exchange for immediate capital lending isn’t a good long-term solution. That won’t fix the fact that they are having trouble competing in today’s marketplace.

    Making the taxpayers responsible for giant corporations’ inability to adapt isn’t fair, and at this point, it seems that it’s not a matter of if they fail, it’s a matter of when.

    As part of the first round of bailouts, we’re paying for ridiculous corporate retreats and parties for AIG executives and a $700 billion bailout of banks who made bad lending decisions. Congress needs to draw the line somewhere.

    When are we going to stop bailing out irresponsibility with taxpayers’ money? Maybe I’m missing the point…when we’ve already spent close to $1 trillion and solved almost nothing, what’s $17 billion more?

  • Al

    I don’t want to see a bailout of any of the automakers, but it looks like we’re headed that way. Here is a letter that I sent to Senators Klobuchar and Coleman and Representative McCollum:

    Please consider creative alternatives to direct bailout of GM, Chrysler, and Ford. These are companies whose greed of the past few decades have led our nation away from fuel conservation and reduced greenhouse gas emissions. Their gas guzzling behemoths have increased our dependence on foreign oil to the detriment of our national security. These companies are not deserving of bailouts using the money of hardworking taxpayers like me, or more appropriately, the hard working taxpayers of my daughters’ generation.

    While I have heard that you would support a bailout of these automakers, I urge you to consider creative solutions. Perhaps financial incentives could be given to companies that hire workers laid off as a result of the demise of the automakers and keep them employed for a certain period of time. You might also use bailout money to pay for the retraining of laid off workers for companies willing to locate new facilities in the areas where the automakers and parts suppliers are floundering.

    In the event that a direct bailout of the automakers is approved, please push to include a sharp increase in the CAFE standards. The technology for some of the increased efficiency already exists. Other technologies are on the verge of completion if we make proper investments. Make the automakers put green technology to use if they want our money.

    News-cutters – Don’t just use your voices here, tell your legislators!