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US Automakers: Live or Die

Posted by David A. Peterson on 17. November 2008 in Economics |

Time to flip the coin. Heads and the automakers get funding to allow them to live for a while longer. Tails and the automakers don’t get funding and they will die a slow but certain death.

 

Where do you stand on the issue? My guess is that most fiscal conservatives will vote for tails, and moderate Republicans aren’t sure what to do. After all didn’t the Republicans just lose an election, didn’t slightly more than ½ of the population vote to do it a new way?

 

Notice in our coin toss that either way, heads or tails, the automakers are in deep trouble. If events keep moving in the same direction then no amount of Chevy Volts will save this industry.

 

Should we let them fail? We need to define what failure is… All three automakers will probably have to enter bankruptcy fairly soon. You can’t keep bleeding cash like these companies have done in the last few years.

 

So if failure means bankruptcy should we as a country let that happen? The answer is yes. Bankruptcy doesn’t mean that Ford is going away and its plants will be liquidated. This type of failure doesn’t mean that all 3 million jobs will be lost. It doesn’t mean that this vital industry will cease to exist.

 

What it does mean is that the three US automakers have to get their legacy costs in line. It is the cost of doing business that has these automakers in a bind. Bankruptcy is the only way to renegotiate those legacy contracts.

 

Who made this mess and created these absurd legacy contracts anyway? Lately all fingers have been pointing to the unions but in retrospect it was the unions and the managements of these companies signing the contracts every couple of years. If management didn’t think they could turn a profit with the deals they were signing then why, oh why did they sign them.

 

Were the Board of Directors for both the unions and the companies involved alive during these negotiations? Did the respective boards actually believe that the pension obligations could be overcome by selling “x” amount of units at an ever increasing costs?

 

At this moment in time the only losers in the US automakers fiasco is their respective shareholders. They are going to lose every nickel. However our government wants us all to share the pain of the shareholders so billions of our tax dollars will be invested. This really isn’t a flip of a coin. Regardless of what you think about the debate some rescue package is coming.

 

Conservatives cannot bury their heads in the sand. They do have a chair at the table and an obligation to legislate the best deal possible for the taxpayers. The role for the Republicans during this crisis is to ensure that any tax dollars allotted towards these programs has some form of return.

In other words if you plan on using my tax dollars I want at least these three things:

  •  A competitive cost structure for US automakers vs. foreign makers producing in the US. (I believe a bankruptcy judge will take care of this one.)
  • An automobile power plant standard that will replace the internal combustion engine in phases. (I’m tired of hearing about this one – we all know we need a comprehensive energy program.)
  •  A distribution of preferred shares purchased at the strike price of the pre-bankruptcy loan. (I’m mentioned this one before, if I’m lending you money then I would like the cash back with interest.)

This coin has already been flipped and it came up “heads” and “tails.”  We will end up bailing out these automakers and we will let them fail and go into bankruptcy. What will emerge is a more competitive automobile industry.

I wonder if one day Toyota will have so much market share and so many US plants that we will end up bailing them out – I bet we will get the same outcome on that coin toss as well?

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