Automaker Loan - For or against?

[Exit]

I can picture a cascading sea of layoffs and business closures so I am for the loan.

 

[Nimrod]

For it = Its a loan, they will pay it back

 

[Alamar]

I'm against just giving a loan because I don't see any evidence that the companies in question will be able to restructure enough to be truly competitive anytime in the relatively near future.

 

[itschris]

They're applying for the money under rule 136 I believe and one of the stipulations is that the company in question must be an ongoing concern. There's little evidence that any of the big 3 can continue on without further and recurring financial injections.

We watched the hearings yesterday on and off for about 5 hours. I saw nothing that would lead me to believe that giving them the funds would change anything. What you have with the automakers are two fundamental problems that won't, or really can't go away, in their current form. First, you have a model that was setup for worldscape of 25-30 years ago. It no longer exists, yet the they're so locked into contractual arrnagements that almost make it impossible to fundamentally change. They have a 16mm car production capacity, but true demand (not even taking current economic issues into consideration) is about 10mm. Do the math. They have 7,000 dealerships doing what 1,200 dealerships of their competitors do. Again... do the math. It goes on and on.

The real problem, however, is the union. Even when a plant goes idle, most are required to pay the worker... typically 95% of their wages. Many of the line workers make above $50K and $60K a year. I'm sorry, but that's just absurd not even taking into account that they still get paid even when they're not working. I could go on and on about the further abuses. Many published reports estimate the cost of the union at about $1,400 per car, but other more detailed analysis puts the union costs up around $3900 net of standardized benefits.

No one wants the automakers to go bankrupt as in Chap 7, but a Chapter 11 would allow them to eliminate contractual obligations that have a complete stranglehold on what they do. The reality is, sometimes things have to get horribly worse before they can get better. They need to completely reorganize and get rid of the union. Think about it... Ford makes the Taurus... do you really need the Mercury Sable which is the exact same car with different trim?

When you think about big changes to economic engines... you need to follow the steps through. Sure, reorganizing will cost jobs and further damage the economy... near term. But at the same time, the result could be a competetive environment for automakers in the US which would eventually overtake the deficits it left behind. You have to think of the longer road. Business needs to be incentivised, but only if they have a viable model.

 

[annunaki]

I am against it. If they get the money at least one, if not all three, will be bankrupt in at least 3-5 yrs. It is a band-aid for a bullet hole (make that bullet a .50 cal). It simply won't help. The Big three need major restructuring. The unions are big source of their demise as itschriss highlighted above. Ignorance to a changing auto environment is also a major issue. They simply have not offered, what I would call, desireable vehicles.

Letting them go bankrupt may be the best thing for them as it rids them of many previous commitments. No one makes a big deal when mom & pop go out of business after 40+ yrs. because they would not change with the times.

I know it is a shame to say that but this is capitalism. We are not a socialistic/communistic/marxcist country... yet. Though we appear to be well on our way.

 

[Midcow2]

Excellent Analysis ItsChris !

They're applying for the money under rule 136 I believe and one of the stipulations is that the company in question must be an ongoing concern. There's little evidence that any of the big 3 can continue on without further and recurring financial injections.

We watched the hearings yesterday on and off for about 5 hours. I saw nothing that would lead me to believe that giving them the funds would change anything. What you have with the automakers are two fundamental problems that won't, or really can't go away, in their current form. First, you have a model that was setup for worldscape of 25-30 years ago. It no longer exists, yet the they're so locked into contractual arrnagements that almost make it impossible to fundamentally change. They have a 16mm car production capacity, but true demand (not even taking current economic issues into consideration) is about 10mm. Do the math. They have 7,000 dealerships doing what 1,200 dealerships of their competitors do. Again... do the math. It goes on and on.

The real problem, however, is the union. Even when a plant goes idle, most are required to pay the worker... typically 95% of their wages. Many of the line workers make above $50K and $60K a year. I'm sorry, but that's just absurd not even taking into account that they still get paid even when they're not working. I could go on and on about the further abuses. Many published reports estimate the cost of the union at about $1,400 per car, but other more detailed analysis puts the union costs up around $3900 net of standardized benefits.

No one wants the automakers to go bankrupt as in Chap 7, but a Chapter 11 would allow them to eliminate contractual obligations that have a complete stranglehold on what they do. The reality is, sometimes things have to get horribly worse before they can get better. They need to completely reorganize and get rid of the union. Think about it... Ford makes the Taurus... do you really need the Mercury Sable which is the exact same car with different trim?

When you think about big changes to economic engines... you need to follow the steps through. Sure, reorganizing will cost jobs and further damage the economy... near term. But at the same time, the result could be a competetive environment for automakers in the US which would eventually overtake the deficits it left behind. You have to think of the longer road. Business needs to be incentivised, but only if they have a viable model.

Very Nice analysis Chris. I agree with you and if the basic business model employed by the big three is no longer working, and as I understand the UAW is not willing to give an inch, so how is loaning ( an not giving) going to
solve anything? It won't I think this a entirely different situation from what Chrysler and Harley-Davidson faced a couple of years back. They need another Delorean, Iacocca or one of those republican mavericks and a reset on UAW requirements if they are going to survive. While they are at it they muight , just might want to consider fuel efficiency maybe diesel or actual hybrids that saves subtantial gas or smaller vehicles. And from my selfish standpoint I would like to see them put a decent audio system in their cars.

Bottom line: "If it ain't broke don't fix it" well it, the business economic model, is "broke" and if you take UAW's myoptic approach it will go the way of railroads, telephone operators and elevator attendants!

 

[jostenmeat]

Good post chris. My friends also hate unions. I know someone, a successful businessman, who used to work in a union factory. He got written up twice.

First time was when the little light bulb on his drill went out. He quickly found a replacement, changed it out, and kept working. He got written up because he didn't call up the electrician.

Second time was because he was working too efficiently. He was making others look bad.

WTF.

 

[tcarcio]

They're applying for the money under rule 136 I believe and one of the stipulations is that the company in question must be an ongoing concern. There's little evidence that any of the big 3 can continue on without further and recurring financial injections.

We watched the hearings yesterday on and off for about 5 hours. I saw nothing that would lead me to believe that giving them the funds would change anything. What you have with the automakers are two fundamental problems that won't, or really can't go away, in their current form. First, you have a model that was setup for worldscape of 25-30 years ago. It no longer exists, yet the they're so locked into contractual arrnagements that almost make it impossible to fundamentally change. They have a 16mm car production capacity, but true demand (not even taking current economic issues into consideration) is about 10mm. Do the math. They have 7,000 dealerships doing what 1,200 dealerships of their competitors do. Again... do the math. It goes on and on.

The real problem, however, is the union. Even when a plant goes idle, most are required to pay the worker... typically 95% of their wages. Many of the line workers make above $50K and $60K a year. I'm sorry, but that's just absurd not even taking into account that they still get paid even when they're not working. I could go on and on about the further abuses. Many published reports estimate the cost of the union at about $1,400 per car, but other more detailed analysis puts the union costs up around $3900 net of standardized benefits.

No one wants the automakers to go bankrupt as in Chap 7, but a Chapter 11 would allow them to eliminate contractual obligations that have a complete stranglehold on what they do. The reality is, sometimes things have to get horribly worse before they can get better. They need to completely reorganize and get rid of the union. Think about it... Ford makes the Taurus... do you really need the Mercury Sable which is the exact same car with different trim?

When you think about big changes to economic engines... you need to follow the steps through. Sure, reorganizing will cost jobs and further damage the economy... near term. But at the same time, the result could be a competetive environment for automakers in the US which would eventually overtake the deficits it left behind. You have to think of the longer road. Business needs to be incentivised, but only if they have a viable model.

Great post, I agree completley. They need to restructure and get their company profitable again. Good money after bad doesn't solve the problem. Where will it end?????

 

[itschris]

We watched about another hour or two today and it was more of the same, but it seemed to break down to more political grandstanding now the Congress seems to understand the interest the public has.

Not surprisingly, Barney Frank was very vocal in favor of the bail out. Odd that he has any business or credibility after his positive endorsement of the Fanny/Freddie models just a couple of months before the collapse.

I think the reality is, you just can't have folks making $60-$80K a year, having full retirement and heath benefits, for lower end line work. I understand the idea behind the unions and I understand the liberal thought behind it. It sounds... well sound... on the surface when you think about it - an organization designed to protect workers from exploitation and provide them leverage in negotiation. But these liberal eutopian ideas will at some point meet head on with reality and reality always wins. Any model that produces more than demand and has a compensation structure seperate and distinct from that same demand, is going to fail. It will and there's no way around it. I feel bad that union autoworkers may at some point be forced to a wage scale comiserate with other similar style work and result. It's also sad that 3 of the 4 Ford dealerships that I pass each day on my 25 mile commute to work may have to close. But in the end, and it will take time, you will gain the momentum of efficiency. That's a very tough force to slow down since it's flexible and adaptable. Maybe the new autoworker makes $38K a year. There's a lot of clerical people who work a lot harder at my office who make less than that and have far less residual benefits.

I think our country has become so short-sighted. We've become the 30 second soundbite crowd that wants and expects everything to happen quickly, perfectly, and with the expected results. We can surgically blow up buildings from 20,000 feet, we can cook a hot dog in 27 seconds, we can get our news, gourmet coffee, and appartently all we need to know from the media in just a few short, unbothersome minutes. The problem is, we can no longer stomach the flip side to any degree.

Whether it's the auto industry, the healthcare issue, immigration, energy, whatever... we seemingly have no tolerance for it not working, but are unwilling to accept the pain and sacrifice of what is needed to correct it. For instance, I keep hearing we can't get rid of all the illegal aliens... why not? Get rid of all 12 million of them tomorrow. Yeah, a tomato will cost $34 and no one will buy them. But eventually someone will figure out a way, a machine or something, to get that tomato back to market for the same price. And while that is going on, in the background, cities are suddenly not suffering huge deficits from the burden placed on local and state services and everything begins to shift in a positive way. But none of it will be sudden. It will take time, and that's what we all really have the problem with. Whenever it comes to bad or difficult news, our nations becomes the collective monkeys with hands over our eyes, our ears and our mouths. The first thing we need to get over is ourselves, and then we'll see some "real change we can believe in." (yes.. that was a political dig...coud help it.)

 

[Alex2507]

Nimrod and Exit are safe but the rest of you 'down with the union' monsters are going into my
'Nothing For Christmas - NOTHING!' file.

Didn't Davemcc just write a post about how gov. involvement in a few different industries has been catastrophic? The auto industry was included in that. We go from that to 'the union is to blame'? UAW aren't exactly rich. I wouldn't want to be the guy saying 'take away their pensions' or 'their kids won't be needing that college fund'. It's a disaster and I'm not a financial analyst. The general anti union vibe has left me a little disturbed.

 

[itschris]

Nimrod and Exit are safe but the rest of you 'down with the union' monsters are going into my
'Nothing For Christmas - NOTHING!' file.

Didn't Davemcc just write a post about how gov. involvement in a few different industries has been catastrophic? The auto industry was included in that. We go from that to 'the union is to blame'? UAW aren't exactly rich. I wouldn't want to be the guy saying 'take away their pensions' or 'their kids won't be needing that college fund'. It's a disaster and I'm not a financial analyst. The general anti union vibe has left me a little disturbed.

You/re right. It's not just the UAW, but they certainly are a large part of the problem. It's the contracts that are the huge problem and the way the unions tend to extort business to get their way at the expense of long term viablility.

Yes, I wouldn't want to be the one to tell some guy who sits in a chair doing not a whole to earn is $70K a year that he will no longer have that. I don't begrudge anyone making their living ... well... in a legal way. These workers are simply taking advantage of what's availlable to them and I do not fault them for it one bit. They've been enabled by the union and you can't blame someone for getting all they can.

However, in the big picture... if we're being honest... is it justified? Progress always leaves a long road of debris behind it. At some point, there was one guy left, and he made the very finest buggy whip money could buy.... except everyone started driving cars. It's progress. Look at even less obvious examples... if you wanted professional presentations... hell... even business cards... you had to go to a print shop and spend a ton of money. Now? You do it at home on your pc and print it on your color laser on paper you got at Office Depot. Again... progress.

The auto industry is building the buggy whip. Change is never easy. It's painful. There's a lot wrong with the auto industry... the UAW is just one facet. You're bailing water out of a sinking ship and it's kept them afloat for the past 10 years or so... barely... but the whole is getting bigger and the bailing is falling behind.

it's time for big changes in much of what we do. The question becomes... do we do it all now ... just rip the band aid off and take the pain... or do we continue to just tug at for it a long time until we're finally forced to do what we should've done long ago?

 

[markw]

What good would a loan do?

Why didn't they make the appropiate adjustments to their business plan long ago when they first saw this day coming, asy in hte eighties or nineties?

Or are they saying they didn't see this coming?

In any case, what are they planning to do with this "loan" to make them a viable business in the future? Were they hit with some religious epiphany that suddenly gave them the wisdom and knowledge to make it all better?

and, why didn't they do it sooner?

In any case, the big three have such a large presence in other countries that they won't miss their presence in the U S of A. They may miss their ever-dwindling market here but, on the whole, they make more money in emerging countries.

FWIW, they might want to think about how foreign manucacturers manage to run plants here in the states, pay the workers a living wage, turn out a good product, and still manage to make a profit.

hint : The problem, may not be just the big three themeselves. There may be a parasite that's taking too much nourishment from the host, thereby slowly killing the host.

 

[jinjuku]

It's not just the Unions

To place so much emphasis on the Union being center of the problem the Big 3 are facing is wrong headed in my opinion.

The real problem is I would rather own a Japanese brand vehicle. So would a vast majority of others that remember the 80's and 90's domestic quality (or lack of). Customers they will most likely never get back.

Nissan as an example brought out their 2.4 litre inline four in 72' I believe. It was a straight up tight tolerance design in 72' and only got better as they stuck with the same basic design for 25+ years.

The US automakers have been going out of business for the past 20-30 years. The problem with the domestics have been more about engineering and design than assembly.

It's funny the the same Geo's/Toyota's produced in California have almost identical reliability rates. All done with American labor. When a friend wanted to buy American I steered him towards the Pontiac Vibe. I took the lid off the air filter and Toyota was stamped around the filter edge...

Agreed some one putting bolts into a machine shouldn't be earning $70K/full pension. Unions are really going to have to either change or simply go away. If you hate putting bolts into a machine for $14/hour and meager benefits go back to school.

 

[Davemcc]

Didn't Davemcc just write a post about how gov. involvement in a few different industries has been catastrophic? The auto industry was included in that. We go from that to 'the union is to blame'? UAW aren't exactly rich. I wouldn't want to be the guy saying 'take away their pensions' or 'their kids won't be needing that college fund'. It's a disaster and I'm not a financial analyst. The general anti union vibe has left me a little disturbed.

I haven't made it any secret that I'm an autoworker and will be affected by the outcome of all this. But in my view, Chris is absolutely correct. The result of decades of union gains is more like extortion than anything else. It is certainly not negotiation, as in the mutual agreement of two free and willing partners. Every time a contract comes due, the union makes "demands", not offers and they are willing and legally able to hold tens of billions of dollars in company assets hostage in a strike during the "negotiation" process. Since no company can have it's means of production idle for very long periods, it simply becomes a game of boardroom chicken between the company and the union. The current set of laws favors the unions and has for decades.

The other factor to consider is the decades of past contracts. The front page of my local paper shows that GM has 1200 people working and 2400 retirees right here in my city alone. Overall, the Canadian GM pension plan has a $4.5 Billion deficit. This is entirely the legacy of decades of laws that favored the union at the expense of the long term interests of the company. Let's face it, the domestic auto companies did not want to become the victims of mass extortion every three years!!! How is this their fault??? I can lay the "flawed business model" right at the feet of the governments that passed these and other similarly stupid, short-sighted and vote-pandering laws.

As I've said before, it's the government's mess, let them clean in up. Even if the aid package only gets the domestics over the hump in the economy, it will be less damaging to the overall economy to let the companies reorganize at a time when the rest of the economy is not in meltdown mode. Blow after staggering blow to an already reeling economy is an unwarranted invitation to disaster. Let the housing and credit markets rebound, let the stock market regain some strength and let the domestic consumer market recover somewhat before we lay off millions more people, reduce pension income for retirees and leave tier 1 and tier 2 suppliers with billions in defaulted payments. Six months or a year from now, probably nobody will notice if Cerberus closes up Chrysler and sells off the assets.

In the end, I am for the bailout and against it. Get the automakers past the near term economic weakness and let the restructuring take place when the economy is not already weakened. But if we are going to hold the automakers to a free-market standard when they are in trouble, then let them operate in a free market. Lose the outdated laws protecting the unions and let companies have real "negotiation" instead of "extortion". There is a terrible double standard in play here, legislatively forcing the automakers to run their business in a social utopian model then rubbing their noses in free-market dogma when that socialist model inevitably fails. Pick a side, free-market or socialist, and apply it to all aspects of the domestic's business model. But please don't pretend that the free-market has been in effect up to this point.

 

[Alex2507]

A buggy whip analogy doesn't make me believe that UAW make $70k/yr for sitting in chairs. I have known a few UAW. Seems like they all got up, went to work in the morning and came home tired. The foremen had a weird habit of having nervous breakdowns. I have no idea why but I thought that was funny.

I would be interested to know if you ever would have accepted an offer to double your income to work as a UAW for the rest of your life. My point is that not only is it not a free ride, it's also not very appealing. Those cars don't get built by people sitting in chairs. Which reminds me that I should get out of my chair and do something better than debating with a debate champ.

 

[Davemcc]

The foremen had a weird habit of having nervous breakdowns.

I know why.

 

[Alex2507]

I haven't made it any secret that I'm an autoworker and will be affected by the outcome of all this.

I had no idea. I'm surprised to hear that. Good luck to you whatever your view is on the union thing.

I am not going to sign out with name calling in tiny letters and a big grin surrounded by coughing.
Seems a little close to home for jokes.

-Alex

 

[Alex2507]

I know why.

LOL! You're a foreman! Oops, my bad!
It's stuff like this that keeps me from getting anything done in the condo.
That did crack me up royally.

 

[Midcow2]

Alex are you the Dilbert philosopher of Audioholics ?

Nimrod and Exit are safe but the rest of you 'down with the union' monsters are going into my
'Nothing For Christmas - NOTHING!' file.

Didn't Davemcc just write a post about how gov. involvement in a few different industries has been catastrophic? The auto industry was included in that. We go from that to 'the union is to blame'? UAW aren't exactly rich. I wouldn't want to be the guy saying 'take away their pensions' or 'their kids won't be needing that college fund'. It's a disaster and I'm not a financial analyst. The general anti union vibe has left me a little disturbed.

Alex are you the Dilbert philosopher of Audioholics ? You always tell us very candidly the truth and point out that there is an "elephant in the room" or that the "emperor's new clothes don't exist"

Thanks again for you viewpoint LOL or is that your monkey speaking?

 

[Davemcc]

LOL! You're a foreman! Oops, my bad!
It's stuff like this that keeps me from getting anything done in the condo.
That did crack me up royally.

No, I'm not a foreman. I'm just a union grunt, along for the ride as our union leaders embarrass us at every turn. Yesterday's local front page called our national union leader a petulant child and I don't disagree. Yet what am I do to. The union mentality of entitlement and activism is ingrained in the automotive culture. I needed a job fast when I got done university and lucked into this at the right time. I've done some really crappy mind-numbing and body-crippling work over the years and it's always and only the paycheck that keeps me going back.

As to the foremen, they truly live their lives between a rock and a hard place. On the one side, they are under extreme pressure from management to meet or exceed production, often with little in the way of resources for maintenance or technical support. On the other side, they have to prod, cajole or compel workers to perform who have no fear of discipline and no urgency in production. Bad workers cannot get fired under union protection and discipline means little, (unlike the situation at the "new domestics", one more strike against the free-market diatribes being hurled at the Big 3's management teams). As a rule, workers have no fear of their foremen but the foremen fear their managers.

Fortunately, where I am now, virtually all the workers are very tuned in to increasing production and productivity, assuring quality and working as a smooth functioning, effective team. This makes it easier on the foremen from our end, but they are still under intense pressure from management even when no act of union, trades or supervision personnel can make broken equipment operate.