NorCalSavant

Congress and the White House seem to be close to an agreement to bail out General Motors and Chrysler with fifteen billion dollars of emergency aid.

The Detroit Big Three including GM, Ford, and Chrysler have seen their domestic auto sales drop precipitously in the ongoing recession.  They have been hit from two sides.  As gas prices rose to historic high levels, consumers walked away from the big gas guzzling trucks and SUVs that were their main serving to the marketplace.  Secondly, recession and the accompanying credit squeeze have caused auto sales to drop for all manufacturers, even those producing gas friendly-hybrids.

The losses at the Big Three have mounted, so much so that GM and Chrysler need emergency cash failing which they may have to shut down and seek bankruptcy protection.  Ford is not in that bad a situation, although it is not sitting pretty either.  A Moody’s representative testified in Congress that the Detroit auto industry might need up to $125 billion to turn around.

Congress had already authorized $25 billion for the auto companies to produce environmentally friendly fuel-efficient vehicles in September.  The Big Three have come back to Congress a second time to ask for more money.  GM and Chrysler are asking for immediate aid.  Ford just wants to have an emergency line of credit available if it needed cash going forward.

All of them said if any one of them goes under, the whole industry will get adversely affected because they share the same suppliers.  So, even though they compete vigorously in the marketplace, they also benefit from each other’s presence as a parts-sourcer from a common supplier in the industry.

They want Congress to give them 34 billion dollars in emergency loans to survive the downturn.  In short, they want Santa to bring them goodies this Christmas.

It is hard to believe that if any or all of the Big Three failed tomorrow, we won’t have cars to drive to work in.  A number of Asian and European car companies already assemble and sell cars in America.  They will easily increase production to meet any shortfall in supplies.    It is also fair to assume that there would be no strategic loss to U.S. technological capabilities impacting our strategic defense.

The troubles with the Big Three are not new.  They have had repeated problems before.  The quality of their cars left much to be desired, and their offerings in the fuel-efficient segment have been lacking.  They let the foreign carmakers take the lead on both quality and fuel-efficiency, and happily looked away preferring to make money on big gas guzzling trucks and SUVs.  They steadily lost market share.  Gas prices have had spikes before, and the car buying public had turned away from them under similar circumstances. The Big Three never seemed to have learnt the lessons.  They should have planned and organized their business better.

So what then is the problem with letting one or more of them go under?  After all, isn’t that how the marketplace is supposed to function – survival of the fittest, and death to the weak and the inefficient?  We’re not talking human beings here, so please don’t get sappy on me.  A lot of behemoths have gone under before.  Remember Pan Am, the icon of airlines in the 70s and 80s?

The problem, as I see it, is the terrible time it would be for an unhealthy auto company to die now given that the domestic auto industry directly or indirectly provides employment to millions of fellow Americans.

What we are going through right now is no picnic.  The economy is nose-diving to abyss and unemployment is rising in tandem.  The vicious circle of economic downturn causing unemployment, in turn exacerbating economic downturn with a lack of consumer spending will only get more vicious with an auto company failure at the moment.  After all, consumer spending accounts for over 70% of national economic activity.

A failure right now of any of the Big Three would be catastrophic to the economy as a whole.

So what’s Santa got to do?  Now before bringing him his big Xmas gift for the year, Santa always asked Little Johnny if he had been a nice boy this year.  Little Johnny had been dutifully reminded by Mommy and Daddy to be a nice boy ever since his Christmas wish was a little twinkle in his eyes.  The Big Three have not been nice boys for a long time in recent history with their mismanagement, but they can get a gift from Santa Claus if they really promise to mend their ways.

Congress should provide the minimum necessary loan to GM and Chrysler, but with stringent conditions attached.  GM and Chrysler must produce credible plans to be economically viable auto producers even in the face of worst possible sales revenues.  They must also produce highly fuel-efficient vehicles within a technologically feasible window of time to meet federal goal of reducing greenhouse gas emissions as a condition of accepting the loan.  Most of all, the management team which has allowed its company’s market share to decline steadily and led the company to ultimately be in this soup must be fired as a condition of this bailout.

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