Friday, November 21, 2008

Big Three Bailout?

This whole thing has been so well covered that I am not going to bother to link to anything. If you live in an off grid retreat and somehow only get news from my site then hop into Google and type in "big three bailout", 99% of you have a pretty good idea what is going on.

First of all, conceptually I am not a fan of bailouts. I do recognize that sometimes the government can fill a role as a lender of last resort for fundamentally sound institutions of national importance that have short term cash flow issues. Calling the big three sound, let alone fundamentally sound would be a huge stretch. Their business model is pretty much fucked. I looked for a good solid definition of business model and quit after a couple dozen clicks and no good luck. Here is what Wikipedia has to say. I am going to make my own informal working definition and to do this I will borrow from this definition. The definition I will use is "how you are going to make money from what you do/ produce". Obviously people conduct business almost exclusively for profit so there isn't much of a point in doing business if there is nothing in it for them.

The big three have been on life support for a long time. Their labor costs are far higher then those of other car makers. If a town has two pizza parlors one of which pays employees low wages and another pays them very high wages the one that pays the higher wages will either have to charge far more or have a much thinner profit margin. Charging more tends to mean you will get less business unless the other product really sucks. Lower margins mean that less needs to go wrong for you to be in trouble. The big issue is that the big three just aren't making enough money off of the cars they sell mostly because their labor costs are out of line with those of the competition.

These loans/ whatever we call them would give these companies a few months of working capital. They would not by any means solve these fundamental problems. I believe these problems (hemoraging money) can not begin to be addressed unless labor costs come down. A significant concession by the union would not fix things but things won't get fixed without it. I think a potential long term solution would be 40% getting costs down, 40% improving sales and 20% something else. At the same time I don't think any one of these things is going to be enough to do it without the other two.

As for if we should help or not I can't see a purpose in wasting out precious IV bags on a patient who is going to just bleed them onto the floor. It would be wiser to save them for a patient who they can save. Now if we can stop the bleeding (labor costs) and the pulse (sales/ innovation) strengthens a bit then it could be prudent to give them some time by using those precious bags (money).


Off Grid Survival said...

What I worry about if these companies go under is our national security. The manufacturing lines are essential to our security, if they go down the military would have a hard time during a major war.

The Manufacturing lines would be essential for building military equipment and vehicles. I'm against another bailout but if these companies go under we are all in big trouble.

I drive my tractor in pearls... said...

The Big 3 arent car compaines, but heath care companies that happen to make cars on the side.

If they go under, the assets are still available - meaning, someone will come in and buy the factories, the equipment, the raw / almost finished materials. This would give the US auto industry new blood with out having to carry the failings of the previous auto maker.

If the US govt wants to help, they would do better to get out of it entirely - the emissions rules, the safety rules, all of it - having to retool at the Govt's whim is killing them.

The free market will take care of the other issues. I want to drive a car that gets better fuel economy and is safest for my kids - most people do.

On a side note, I have been surprised that Ford, being a family business, has not done more to break the stranglehold the union has - it seems to me that they have the most to loose, but maybe I am just wrong. It seems that they are not as far removed from good practice as the other automakers as Ford was the last one to offer financing since Ford believed that if you had to finance it, you probably couldnt afford it and he wouldnt do that to his customers.

Shy Wolf said...

Right: let 'em die natural deaths and let the chips fall where they may, then start up anew. The union bennies, especially the retirement bennies, are killing all US business.
Insofar as National Security, OffGrid: we probablt get more of our 'real' military supplies from China than GM is 'selling us' in Hummers.

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