The “Other” Bailout, Part 4

Over the past several weeks we’ve taken the "Detroit 3" auto companies to task for requesting taxpayer bailouts (sorry… "loans") to be used to supposedly help them compete and create high efficiency vehicles.  Remember, these are the same comapanies and politicos that complain they can’t compete with foreign companies thanks to government-sponsored "subsidies."  Go figure.

Well the "loan" program was approved by Congress over the past weekend, obviously dwarfed by that other slightly larger bailout program.    Both basically remove accountability for past leadership failures.  But today let’s tackle, perhaps for the last time, the Detroit 3 bailout.

First, there was a great letter to the editor a week ago that described my feelings exactly.

Please tell me it’s not true that Congress is considering legislation to loan at a low-interest rate up to $50 billion to General Motors, Ford and Chrysler. Talk about a moral hazard, bailout and an entitlement mentality. Why don’t they sell more stock in the marketplace or find more private equity?

Why do they need $50 billion, when Boeing can design and build from self-generated funds a whole new airplane for $10 billion?

For over two decades, Toyota and Honda have designed and built automobiles to give dependable service for 150,000 to 200,000 miles. Toyota is even reported to consider exporting some of their U.S.-assembled automobiles overseas. This is why they are eating Detroit’s lunch. Detroit has had ample opportunity to observe this and to compete, but has chosen not to. Should this behavior be rewarded on the backs of the U.S. taxpayers?

Of course it shouldn’t be rewarded.  But it is, with taxpayer dollars.  At least Congress heard some of the complaints and put some restrictions on the loans.  And the Detroit 3had the gall to complain.

That bill says the money can only be used to overhaul plants that are at least 20 years old and will be upgraded to make vehicles that offer about a 25% improvement in fuel economy over similar models in their class.

Auto makers want the rules loosened to allow more leeway on how they can use the money.  "We have to have the rules written in a broad enough fashion so that we can get to energy independence," Chrysler LLC Chieve Executive Robert Nardelli told reporters.  Mr. Nardelli suggested that Chrysler may have to cut jobs if it doesn’t get access to loans from the government.  "We’ll have to make some tough decisions," he said.

Then it would be about time they made some tough decisions.  The easy decision is to cut jobs; the tough decision is to focus long-term instead of on short-term profits.  The current mentality, or lack of leadership vision, is what lead to the bizarrity of new truck models coming on line just when demand for trucks fell off a cliff.

Ford CEO Mulally, who should know better after his supposed lean days at Boeing, weighed in with similar nonsense.

Government loans awarded to three major US automakers are justified as they need them to meet new environmental regulations, Ford chief executive Alan Mulally said Thursday. "This is not about a bailout," the Ford chief executive told AFP in an interview at the Paris auto show.

Yeah, right. But he goes on.

The former Boeing chief executive rejected the argument that Ford had focused too heavily on larger, gas-guzzling vehicles and failed to anticipate the developing trend towards smaller cars. "We weren’t pushing these larger vehicles, we were just building what our customers wanted," Mulally said. Although SUVs and larger cars are less fuel-efficient, they carry bigger profit margins that can significantly boost an automaker’s bottom line.

"Building what the customers wanted?" Perhaps "building what the customers wanted yesterday" would be more accurate. And exactly how big are those profit margins when the trucks sit on dealer lots, forelornly hoping to be sold after huge incentives? Obviously since market change was something that no one could predict, and the "loans" are offered to any company with factories in the U.S., then even the Japanese companies with U.S. operations should want access to the taxpayer’s dollars too, right?

While the three big US companies have requested government cash, Japanese automakers Nissan, Honda and Toyota have said they would not seek to access funds from the 25 billion dollar package.

Oops. Perhaps there was a vision and leadership issue after all. On Monday Joseph White really nailed it.

The U.S. government is about to offer billions to an industry that spent much of the past decade indulging itself in short-term strategies to boost profits and avoid reckoning with harsh reality.

Still, the Detroit auto industry has only itself to blame for clinging to an approach to business that was in deep trouble 20 years ago, and has been obviously doomed since early in this decade.

And perhaps these "loans" can force some changes.

But the companies that make it to the other side of the current slump won’t look much like the companies we’ve known for the past 100 years — from the vehicles they offer to consumers to their business structure and possibly ownership they will be radically changed.

If America’s taxpayers lend a helping hand to the Detroit Three, in the form of subsidized loans, the auto makers will face enormous pressure not to squander the opportunity by using the money to do business as usual.

I’m not so confident.  You would think that twenty years of eroding market share, perception of quality, and customer value would be "enormous pressure," but it wasn’t.

GM and Ford won’t follow the same exact path. But if these 100-year-old companies want to celebrate 125th anniversaries they will need to put the status quo where it belongs: on the ash heap of history. Otherwise, the government could wind up wasting your tax money by helping them out.

Again.  And again.