No Bailout For The Big Three Automakers

Most of us were pretty adamant that we did not want our tax money going to bailout failing financial institutions on Wall Street, especially since those same institutions were failing due to government regulations that forced them into bad business practices. Here we are several weeks later and it is looking like that bailout is going to go down in history as a huge, $905 billion failure.

Now, Congress is talking about bailing out the Big Three automakers, General Motors, Chrysler and Ford. I am against this bailout for essentially the same reasons as being opposed to the Wall Street bailout: bad business practices being forced upon the automakers, not by government, but by the United Auto Workers Union.

Plain and simple, because of the lunacy of the union negotiated contracts, American automakers cannot compete with foreign automakers and produce a quality car for the same low price. Thus, Detroit is in big trouble with no way out.

Investor’s Business Daily, giving credit to former Clinton Administration official Robert Riech, goes through the issues that the union brings to American automakers and why those issues prevent Detroit from competing in the world market.

Reich says that if a bailout is to be given, then the unions must be willing to give back many of their contract perks. I say that these same issues show exactly why no bailout should be given at all and the Big Three should be allowed to go into Chapter 11.

From the IBD editorial page:

[T]he companies’ poisonous contracts with the United Auto Workers union have to be torn up. The problem is that the UAW, under President Ron Gettelfinger, remains adamant: No givebacks. This is financial lunacy.

Thanks in part to managerial incompetence, but mostly due to pricey union contracts, it costs American carmakers too much to build cars here; they can’t compete. When you fold in health care, pensions, hourly pay, vacations and the rest, average total compensation for a Big Three autoworker is $73.21 an hour, according to data cited by University of Michigan economist Mark Perry.

Toyota, Honda and Nissan pay a still-generous $44.20 an hour in total compensation — a cost edge of nearly 40%. Is it any wonder that Ford, GM and Chrysler can’t compete? Or that, after paying their workers, they never have enough cash left to retool?

That last paragraph shows how union contracts are holding the automakers back. The automakers cannot afford to retool because they are doing things like paying laid-off workers 90% of their salaries for not working.

More:

These aren’t temporary problems. They’ve been brewing for decades, as management agreed over and over to labor deals that now financially strangle the industry. Yet, UAW’s Gettelfinger claims the weak economy is to blame for the industry’s woes. Nonsense. As blogger (and former corporate CEO) Jim Manzi notes, American carmakers in 1960 owned 90% of the U.S. auto market. This year, for the first time ever, that share slipped below 50%.

Japan’s Big Three — Honda, Nissan and Toyota — make anywhere from $900 to $1,600 in pretax profit on each car they make in North America (mostly in southeastern states, with non-union contracts). America’s Big Three, by comparison, lose anywhere from $400 to $1,500.

Truth is, they’re being out-hustled and out-priced in their own backyard due mainly to labor agreements that have driven up costs and become a millstone around their neck.

Chapter 11 will allow the Big Three to tear up those union contracts and start fresh. That is what is needed more than anything else.

Jack and Suzy Welch at Business Week make the case for Chapter 11 as well.

A government handout, however, isn’t the way to make that happen. Washington would impose conditions and promise strict oversight, but it simply can’t push through the kind of transformative change the industry needs. There would be too much political opposition, and regardless, the bailout sums being bandied about—$25 billion of taxpayer dollars, for starters—would only keep the Big Three heaving along, basically as they are. It’s a life-support solution, not a cure.

That’s why the boards of the automakers should take the courageous step of putting their companies into bankruptcy. Some creditors might make the case for liquidation, but given the diminished worth of the automakers’ assets, that’s an unattractive scenario. Instead, creditors would most likely opt for the government stepping in as the debtor-in-possession financier supporting the reorganization.

Talk about a fresh start. For more than a decade, U.S. carmakers have chipped away incrementally at massive legacy costs. But reorganization would open the doors to meaningful structural change through the renegotiation of contracts with creditors, dealers, and unions. And it would offer better odds of paying back taxpayers.

A bailout is not going to work and it certainly will not encourage the UAW to do the right thing and allow a massive reorganization of the Big Three’s management and production practices.

A majority of Americans were against the Wall Street bailout and it turns out that we were right to be opposed. But the Democrats in Congress are itching to repay the UAW and other unions for their political support during the elections, and they want to repay them with our tax dollars.

We need to send another message to Congress that this bailout is not acceptable. We need to tell Congress that the interests of the American people must take precedence over the interests of a bloated and self-serving labor union.

You can access these articles on-line here:

If No Givebacks, Then No Bailout
Investor’s Business Daily Editorials
November 17, 2008

GM: The Case Against A Bailout
Jack and Suzy Welch
Business Week
November 18, 2008

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2 Responses

  1. I agree that the Big 3 have abused alot of oppurtunites to increase sales flow by not manufacturing a vehicle to meet current needs. The problem lies deeper than that though and involves the fact that tighter lending options and job losses have snowballed the effect of consumer purchasing. Even with the dropping fuel prices the influx of customers has dropped off to almost nil and automotive businesses are dying off at an alarming rate. The loss of jobs by people employed by these companies only adds to the dismal outlook of our failing economy. We have to do something to stop the bleeding and fix this problem. If the government does not do anything where do all the unemployed people go (perhaps to Honda, Nissan, Isuzu)? Well guess what….they are not doing any better. To sum up “More people out of work does not benifit the economy”. Something needs to be done!

  2. I too, oppose a bailout of the auto industry, but this seems to be a futile argument. If we are going to bail them out, why not try to address actual problems instead of just handing them a bag of money.

    If we took that $25 billion and used it to help alleviate pension and health care costs, it would certainly cost less than $25 billion and it would almost instantly bring the Big Three back to profitability.

    There are also inefficient government entities like CAFE (fuel efficiency) and NHTSA (safety) that mean well, but place unfair or biased burdens on automakers.

    Now that a bailout will be reached, everyone from Congress to the average citizen will forget about the problem until the auto execs come in their private jets to Washington for another bailout. We need to examine the entire industry and come up with solutions and not bandaids.

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