Nov 16 2008
American Car Companies: Bailout Or Not?
In the grand economic scheme, that is the critical, urgent topic du jour. I am profoundly conflicted on this one.
On the one hand, I agree with Michigan Senator Levin who, on “Meet the Press” this morning, said that more than 3 million American jobs are at risk if we don’t do something to help the three American car companies. I agree with Levin that this is a main street issue, and that no other country in the world would just let its auto industry die.
On the other hand, I tend to agree with the opposing (mainly Republican) point of view, which is that the US car manufacturers brought these troubles on themselves by longstanding mismanagement, poor designs that nobody wants, questionable quality for too long, etc. I also agree with the position that if you bailout the big auto companies now, where does this end? Are the airlines or aircraft manufacturers next? Or the big retailers who, except for Wal-Mart, are bracing for the worst Christmas shopping season since the Depression era?
What do we do? My view is mixed, and so are my prescriptions to fix this untenable situation. First, I do believe that the US auto industry is an important part of our dwindling manufacturing base and we should not just let it die. And, if we were willing to prop up the struggling financial sector, then we should also be ready to give a helping had to a major American industry like auto manufacturing.
This blog is principally about marketing and branding, so where do these concerns fit into this bailout discussion? I don’t think I know of a soul who thinks the branding and marketing of the US auto firms has been any good for too many years — perhaps forever. In terms of branding, there is a depressingly large number of US auto brands that today should no longer exist because they are weak, undifferentiated and essentially have no future. These brands include Buick, Pontiac, Chrysler (BTW, Dodge is only just hanging on in trucks…their cars are DEAD), Mercury, Saturn (what does that brand now stand for??) and Hummer (don’t even get me started on this dinosaur brand). Even the once proud Jeep brand has been dangerously diluted because of Chrysler’s gross mismanagement of its brand portfolio.
I am not the only observer who has pointed out these brand deficiencies. But, how many US auto brands have been actually weeded out in the past generation or longer? Just two that I can recall — Oldsmobile and Plymouth.
The marketing for all of these brands is also pathetic, and I don’t just mean the truly terrible US car advertising (incidentally, I think the entire auto industry advertising, foreign brands included, is bloody awful with just a few exceptions). The American car makers just don’t know how to build value and demand in their products, and thus they can’t price them effectively to succeed. It is rebate every time, all the time. No wonder people don’t put much value in these products. Regarding the advertising, the big advertising agencies and their mega holding groups that have been turning out this dreck for the US auto manufacturers during the past fifty years (and making tons of money in the process), should have their auto gravy train derailed immediately — bailout or not.
Now, what to do regarding the current auto industry crisis? I believe we need to do something to shore up the rotting support pillars of the auto business. If the US government had to do it all over again, I would bet they would not just let Lehman Brothers fail like they did a few months ago. Everyone agrees that Lehman’s bankruptcy was the straw that finally broke the back of the financial system. If we had bailed them out, things might have been different. Perhaps. But, maybe not. Who really knows?
All of that said, if we do decide to help the three American auto manufacturers, I think the pre-conditions mentioned by the supporters of this lifeline need to be even stronger and more tilted to the American taxpayers, whose hard earned money will be used for the bailout. I think the management of every auto maker that accepts bailout money has to go. Rick Wagoner, GM’s CEO, cannot expect to keep his job (and neither should his board), if he gets money from the taxpayers. Chrysler and it’s private equity owner Cerberus Capital, should also be forced to have new management and a new financial structure. Cerberus bought Chrysler hoping for a financial windfall in a few years. They should now be forced to give up a big stake in the company to get government assistance to keep them afloat. Ford has done a comparatively better job, but like the other two companies, they cannot expect to get money and just keep the same governance in place. You want the money, you give up control. That is the capitalist way and it should apply in government bailouts, too.
The unions and suppliers will also have to take their hits, and agree to major changes to ensure the survival of the industry. Everyone in the system has blame in the car industry’s failure, and they all have to accept some of the pain going forward if they expect help from the US government and the rest of the American public. That is only fair.
Finally, as President-elect Obama has made clear, if they get money, the auto makers have to totally re-engineer their product lines to emphasize fuel efficient cars and trucks. That has to be a non-negotiable. For too long, US auto makers have fought the fuel efficiency and safety standards. No more if they want the public dough. We own you now. It’s our way or the highway.
I am a true and loyal car guy. I have also been sadly and deeply critical of the US car business for years because of its insistence on building crappy products that usually fail in the marketplace. While I don’t think we should reward that incompetence, I do feel that the US needs to think hard about letting a major part of the economy just die on the vine. If the big three US auto companies accept the kind of tough conditions I outlined, then I think it’s worth giving them a hand. If not, then President-elect Obama and the congressional leadership should let them sink into oblivion and let Toyota, Honda and Hyundai divvy up the spoils.
For the car companies, it is now fish or cut bait time. If they want the money, they must essentially give up a lot of control and do things very differently. That is probably their only chance at this point. They should take it. If they choose not to, then I have no sympathy for them.
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As your post observes, the reason the auto industry is in dire straits is due to their inability to compete in the local or global marketplace. Anti-union voices may point to the $2,000 per car premium arising from direct employee benefits. Union supporters can compassionately observe that it the premium is a necessary evil and should not be victimized given the context of Wall Street big payouts and the excesses of the uber rich. Marketeers can analyse the lack of focus, discipline and courage to make hard choices in senior management decision making.
But the bottomline question that needs to be answered prior to awarding any form of support is: would any automobile purchaser buy product from a bankrupt manufacturer with an already tarnished brand and reputation?
To paraphrase a “Dear Abby” headline” Can this industry be saved?
At the end of the day, we will all have to realize that the world is now a different place. As manufacturers, producers and consumers we will now all have to think hard, do our homework, abandon our past of self serving agendas and work together to define our new place in this new world.
I think we can do it if we follow through with our desires as expressed in the Presidential election outcome: to work collaboratively and take the politics out of the processes.
Yes we can… and now we must.
Leslie, excellent points! And you underscore a key problem facing the manufacturers and a major part of their pitch for the bailout money: If they go bankrupt, already skittish consumers will flee completely from the US brand showrooms.
Something needs to be done, that is for sure. The problem now is that the vanquished party (the Republicans) see this as an issue to restablish their mojo. They are drawing a line in the sand on this issue, which will make it very tough to get any action on the bailout. The Republicans obviously feel that they have already lost Michigan forever, and that the public has already shown a distaste for funding the bailouts of major industries, so this could be a winner issue for them. We’ll see on that. I am not so sure their political calculations fit the mood of the public right now. Either way, this is going to be a difficult fight for the new president.
PDC
I too am torn on this issue. As you said Patrick, on one hand I’d support the “bailout” given their role in the declining US manufacturing sector. However, part of me says, “where does this stop?” So we “reward” firms who consistently make business decisions that prove to be wrong. Ford’s acquisition of Aston Martin, Jaquar, Range Rover et al, all of which are being divested fo are cases in point. My guess is they lost billions on these transactions. They, Ford and others in the US auto industry lacked a focused strategy…the paradigms have been shifting, the second wave is here and they either ignored it or believed int he same old way. I still believe bancruptcy has to be given serious consideration.
It certainily worked for the airline industry. Faced with costs, increased security fees, the threats of terrorism Chapter 11 filings worked. The Washington Post wrote, “…fuelGoing into Chapter 11 gave United and US Airways obvious advantages over their healthier competitors. It went on to say how they operated through the Chapter 11 filing process and were able to cancel contracts at will, tore up catering contracts, thus reducing variable costs, adn told employees that their union contract is canceled. Their quote was: “Take a pay cut or take a hike.” They even reneged on promises to pay pensions and throw their workers to the mercies of the government’s Pension Benefit Guaranty Corp.
In some respects I think they disrespected the bancrupcy process, but nonetheless, they got through it. In fact, there wasn’t a significant reduction in flyers while they went through the process. I guess I’m leaning toward letting them take fall for their poor decision making and perhaps they’ll be better off in the long run.
So let me make the other argument against bankruptcy. The Chrysler deal in the early 80’s worked. Not without a lot so similar comments coming from Washington lawmakers. Yet it worked because the government put some significant oversight in place, required transparency,and placed significant condition before they received the “loan guarantee”. Ralph Nader recently point out that Congress force Chrysler to contribute $162,500,000 into an employee stock ownership trust fund geared to benefit at least 90 percent of its employees, design more fuel efficient autos to help reduce consumption of foreign oil, and prohibit wages and benefits from falling below a level set three months before the legislation was passed. Provided Congress puts in similar safeguards and conditions it might be OK. Robert Reich in his blog suggests that in exchange for government aid, “…the big three’s creditors, shareholders, and executives should be required to accept losses as large as they would endure under Chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts. The resulting savings, combined with the bailout, should be enough to allow the Big 3 to shift production to more fuel efficient cars while keeping almost all its current workforce employed.” As Nader said, “Congress needs to call on the auto industry to innovate their way out of this morass into which they’ve engineered themselves into.”
The question is: Will they?
In the case of the auto-makers’ bailout, it’s a relief to have a national issue that is so straightforward: American cars tend to break down and fall apart therefore people are not buying them. If GM and Ford don’t want to go out of business, they should start making decent cars. To bail them out would be to reward their terrible manufacturing standards.
Thanks to all for your very thoughtful comments. They demonstrate further how difficult this issue really is from a public policy and national economic standpoint.
PDC