GM, Ford and Chrysler are on the brink of bankruptcy and may run out of money by the end of the year.
Should they get taxpayer money in an attempt to keep them alive?
The big three are said to have four major structural problems:
- uncompetitive products
- customers depend on debt to buy cars
- the dealership structure
- high cost due to health care and pension obligations
It is not true that GM and Ford do not have the products that are more environment friendly, have low mileage and would probably sell better. Ford Europe and GM’s Opel/Vauxhall in Europe offer attractive small and medium size cars with low mileage. It should be no problem to transfer production lines for these to the U.S. under U.S. brands. But the U.S. management seems to be unwilling to do so. They believe that such cars do net sell and push them into niche brands. GM has a total of thirteen brands, Toyota has three. Who is doing better?
The basic idea that car manufacturers should offer producer finance to car buyers seems wrong to me. Companies and their management usually make either good products or are good in banking operation. Partnering with local banks for car finance might be a better way to do that business. And why do consumer finance cars at all? It is quite expensive if you include the full insurance that is demanded.
The dealership structure in the U.S. is a consequence of the historic buying/selling habits that are no longer justified. The manufacturers send cars to the dealers in various colors and with various features independent of real customer demand. The dealers are supposed to sell the cars they get upfront, not the cars the customers really want. A different selling system would provide the dealers with one car of each type. The customer could test-drive that car, smell it, feel it and check the possible variants. The buyer could then decide what features and color s/he exactly wants. A clever produce-on demand system could deliver the individualized car within one or two weeks. And why not sell such individually configured cars through the internet?
Health care is an issue where the government could really help the car companies. Single payer universal health care in a regulated government provided system would do a lot to lower health care costs in the U.S. while providing, in average, much better service. For companies like the car manufacturers the effective hourly wage cost would sink and make them more competitive.
Many of the pension obligations companies and cities, counties and states have are already under-financed. Many of their pension funds will go bust and the Pension Benefit Guaranty Corp will have to take care of them. The PBGC is backstopped by the federal government. One can argue that the under-financed pension funds are already a form of silent socialization of risk and losses and in effect a scam. Socialize the companies’ and other pension funds now by putting their money and their obligations into an extended social security system. The effects will be the same than with universal health care.
In my view the government could and should help the car manufacturers. But just to provide loans now when it is obvious that without deep structural changes more loan requests will follow before the inevitable bankruptcy, does not help.
Band aid is not sufficient now. The debt bubble busted and there is deep need for structural changes to get back to some healthy economy. The government can provide some of these structural changes, especially in health care and pensions. The other structural changes have to be in the mindset of the car manufacturers and their management. Any loan to these companies should be conditioned on such changes taking place.
