Fear and Loathing in Detroit: The 25 Billion Dollar Gamble


Cross posted at Politics and Critical Thinking.

Pelosi and Reid are at it again, trying to fill up a vacuous black hole with greenbacks. The auto industry, as we all know, is calling for a $25 billion bailout stop the hemorrhaging of $1 billion a month in cash. GM says it will be out of cash by the end of the year if something isn't done now.

What is at stake? If all of the Big 3 fail there will be a loss of about 2.5-3 million jobs, a loss of 4% of the GDP of the United States, putting at risk the benefits of about 1 million retirees and dependents while severely saddling the federal government with the additional cost of picking up the tab, which is guaranteed by federal law. When it is all said and done it could cost the Fed an additional $150 billion over the next three years. Pretty frightening when you consider it could cost us just $25 billion to save GM. However, this would be great if the information we are getting about the causes of GM's failure were true.

Looking at the short term implications of a GM failure is frightening. However, in order to figure out a solution you have to first understand why we are here. GM claims this is a result of the the downturn in economy which has resonated to their industry. No one is buying cars or SUV's so they are suffering and need assistance. Not really, many of GM'S long term problems have been caused by the high cost of labor and faulty product thinking.


In November of 2007 GM reported a $39 billion hit in profits, one of the largest ever reported on the books. One of the main problems was the excessive labor costs which GM was paying out. It was the equivalent to a cancer eating away at the care manufacturer throughout the years. Keep in mind, these numbers are January 2007, no data is avaliable since the September 2007 agreement between the UAW and GM management does not take effect until 2010.

Health care was the largest portion, its cost was $1,635/car manufactured for a current employee or retired. Line relief, work rules, and holiday pay amount to $650/car manufactured. Add in another $350/car for paying workers while the plant is shut down and no work is going. The UAW has seen the handwriting on the wall, if the car giant is allowed to go under they stand to lose their already eroding base of membership and assets. They have realized, along with GM, the gravy train is long over. Hence the 2007 agreement reached which amounts to too little too late and calls for a bailout plan. The constant raping of GM under the guise of worker protection is costing everyone and boils down to greed.


It would be nice to place all of the blame on a outdated and corrupt entity like the UAW, but alas that is not the case. GM has lost its flair for innovation and creating new products. Not to mention the overbloated management and nameplate owners that have bogged down the company as well. While companies such as Toyota, Honda, and Nissan have been producing quality and more fuel efficient cars, GM has stagnated. GM's CAFE (Corporate Average Fuel Rating) rating is 4th, behind Honda, Nissan, and Toyota. They are 3rd for imported cars and an abysmal 11th for light trucks. It's undeniable, Americans are concerned about gas mileage. Whether it is financial concern or they are becoming more green minded, GM has failed to answer their call by altering their product line in time. GM's upper management, once the toast of the town for innovation, creativity, and leadership is now as bankrupt as their company.


GM failure puts us between a rock and a hard place. Due to the UAW and GM's stupidity it would be nice to say let them fail, they caused it. But when you make up 4% of the nation's GDP, this is not an option, then again a bailout shouldn't be either. What makes people like Pelosi and Reid think it is going to work in an environment that is much more difficult? Minus the moral implications of corporate welfare, you have the growing concerns of the American taxpayer; where does this end and who is going to pay for it?

First option, and not to popular, is Chapter 11. This would allow GM to stave off credit obligations and give them time to restructure for the 100th time. There would inevitably be some layoffs, however, you would not be facing the loss of 200 thousand plus workers we are facing now. Also, GM stock would stabilize, albeit at low levels, but their would be time for growth potential and possibly renewed interest by investors. We have already been down this road with the steel and airline industries. Both have gone through this painful process but adjusted and rebounded, why should car manufacturers be any different?

Second option is merger, why not turn the Big 3 into the Big 1. The corporate and industrial infrastructure is in place, the cash bleed off would be alleviated, and you could spread out debt obligations. Along with this, Detroit's attitude towards business would have to change. This would require them to follow the Japanese models for production in the US. Which is non-unionized, very innovative in their production lines, and treat their workforce with a certain modicum of respect.

Comments :

2 comments to “Fear and Loathing in Detroit: The 25 Billion Dollar Gamble”
Alien Patriot said...

It is often a problem that big companies do not invest their profits into high ROI projects. Laziness, Corporate greed and market blindness is often the cause of it.

But I'm hurting right now too and I don't know how long I will be able to keep my business going, so I'm like each of these 3 million workers and nobody writes about me.


Critical Thinker said...

Good point, TAP