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Monday, November 17, 2008

Coming Soon: The Chevy Nostradamus

It is looking increasingly unlikely that there will be a bailout of GM or other US automakers, at least not before the new Congress is sworn in next year.

Whether or not we should bailout the Big Three is an extremely tough question, particularly in light of the amount of money we have already thrown at the financial sector. There are reasonable people making arguments on both sides of the issue. Over the weekend and into today, news coverage included many of these folks making their arguments in public.

The one thing that many of them seemed to agree upon was that what GM was experiencing was a failure of their business model. The fact that this assertion was repeated in one form or another by many different people, from various backgrounds, on diverse platforms immediately makes me suspicious. It's as if they all got together before hitting the weekend news circuit and decided on how to present the current situation, but I doubt this is the case.

More likely is that this is just another example of the way a meaningless shorthand, composed of code words, has supplanted careful reasoning in so much of our national debate. This scenario is repeated time and again where policymakers and opinion peddlers fan out for an assault on the nation's mental beaches with nothing more than a microphone and a quiver full of conventional wisdom.

For some actual data on auto sales, click here. The fact is that sales are down for automakers across the globe. Not surprising since it is also conventional wisdom that we are in a global recession. Why falling sales represent a failure of their business model for US automakers, but not so for Japanese automakers is less clear. This argument seems to rely on the 1970's paradigm of Japanese automakers being profitable, efficient, & quality focused versus US automakers being unprofitable, inefficient, & making shoddy products. I really thought this notion had been put to rest ever since the film Gung-Ho came out, but apparently its political half-life is somewhere just this side of nuclear waste.

Sometimes implicit and often explicit to the the failing business model argument is the corollary that Detroit only makes gas-guzzling SUV's and trucks, not the high fuel economy, emission free vehicles we need to respond to global warming. You'll notice in the sales data, however, that these pick up trucks are still among the top 20 sellers. I am not sure providing products that are demanded by the market constitutes a failed business model. A credible case can be made that this summer's spike in gasoline prices combined with tremendous reduction in the amount of credit available to make automobile purchases have combined to result in the current situation. The GM business model may be a failure in the current conditions, but that is because conditions have changed.

Perhaps it is the case that the Japanese, for a whole host of reasons, are better suited to adapt to the changing conditions and succeed in the future. That is not the same thing as Japan being able to predict what specific types of cars people will demand years into the future. After all, if the Japanese had been so forward-looking they wouldn't have introduced their own lines of full size pick-up trucks in the not so distant past. They did so in response to market signals and I'm reasonably sure that not responding to clear market signals would constitute a failure of one's business model.

The fact is that we could use more foresight from US automakers. But what is true for Detroit is doubly true for Washington D.C. Maybe what's good for GM is good for America after all.

3 comments:

Anonymous said...

Will it be better for the country's economy in general to force them through Chapter 11? I know alot of the debt they are carrying is employee pension and health care from retirees can they be released from that?

Jeremy R. Shown said...

No doubt the costs associated with pensions and healthcare commitments for long time employees are among the biggest challenges facing US businesses.

When these commitments were first undertaken decades ago, I doubt anyone had foresight enough to anticipate our current situation (the convergence of rapidly increasing healthcare costs, development of new technologies & drugs, and overall improvements in longevity). The auto industry is the prime example of how decisions made in the past have become burdens due to a change in circumstances.

The failure to mitigate the consequences of pension and healthcare obligations is not just a failure of the current management of the auto industry,but one of industry managements long since departed.

Whether they knew it at the time or not, the auto industry was highly leveraged. That is, every sales dollar the earned in, say, 1965 had to cover two or three (or many more) dollars worth of healthcare and pensions for their workers at some point in the future.

What we may be witnessing is the unwinding of this leveraged position.

Would bankruptcy help provide an orderly way to unwind these positions, maybe. And it is not unreasonable to think that it might be the way forward and better for the economy in general as you mention.

But why we should help the financial sector deleverage without bankruptcy, but not the auto industry isn't entirely clear to me.

Thanks for the comment. Sorry this was so long.

P.S. I think there may be an analogy between the situation the auto industry finds itself in and Social Security, only a much larger scale.

Steve Mc Euen said...

Jerry,
In 1890 my grandfather made his living (a good one too) by hauling freight from Bowie, where the rail-road ended to Globe (the copper
mine. This was the legendary 20 mule team. Transporation (per your comments on the the bailout of the automakers)has been an integral part of the country from almost the beginning. I agree without O'bama's statement that they cannot be allowed to fail, not because they are so great an industry, but because they reflect our lives themselves. Even if they must be taken over by the govt.(us), as the banks were taken over, it is a necessity that we can ill afford to due without. The answer may lie in a form socialism (o that nasty word)or at least a highly regulated
business world. We are living in uncertain times, not only in so far as the economy goes but also as to if and how civilized societies may survive. But they are interesting times and only thoughtful interrogation (as I believe Obama represents)can solve the new problems. As he said in his 60 Minutes interview last Sunday, "only what works" is worthy to be considered.