Wednesday, November 12, 2008

Rewarding bad behavior

From John Cole on the potential auto bailout ...

This is not a damned surprise. They had years to re-tool and build vehicles that got better gas mileage, were more efficient, and used new technology, and instead they spent all their time building behemoths and paying lobbyists to fight higher CAFE standards. It was inevitable that once there was a gas crunch, they would get hammered. Why are we bailing out people who engaged in what was obviously bad business practices for years. Their focus on SUV’s was the business equivalent of malpractice, yet they did it anyway because that was where the quick bucks were.

Not to mention, I am curious how much of GM’s fortunes are tied to their financial services sector. In short, I simply do not understand sufficiently the upside and downside to letting these companies fail. Why should we bail them out. What is in it for us? And if we keep bailing everyone out who engages in bad business practices, where do we draw the line?

I don't disagree, and I noted that yesterday. I'm willing to consider some sort of package that ticks off requirements for the the auto industry to adhere to (higher CAFE standards, funding assigned for R&D that is payable back to the taxpayers, etc.), but I also agree with Cole's basic logic ...

These folks put together a crappy business plan that was ill-suited for the changing economy. We let mom and pop shops fall all over the place when Wal-Mart wipes them out and say 'yay capitalism!' ... why should we let those businesses die but intervene here?


Blogger galawyer said...

I agree that we should not bail the car industry but their fight against increasing the CAFE standards for all those years is not what got them into this predicament. They produced the cars we consumer demanded. Had consumers demanded more fuel efficient cars then that is what they would have made. I will concede that they had an incentive to build the SUVs over the more fuel efficient cars because the SUVs were more profitable. However, they are a business and therefore their raison d'être is to make money. Thus, I do not fault them for making the SUVs all those years. What I do fault them for is not seeing this mess coming sooner and being more nimble in their ability to adapt to those changes. Part of the reason they could not make those changes as nimbly as they could have was because of the horrible agreements they made with the unions over the years. While I think the unions bear some of blame in that, I think the car manufacturers bear more responsibility for accepting those agreements. Thus, I say they got themselves into this mess and they should get themselves out of it.

12:38 PM  
Blogger Brian said...

They produced the cars we liked? Hah! Leaving CAFE standards out of it, they produced an inferior product that many Americans continue to buy only out of sheer brand loyalty. GM and Ford fail in terms of quality 75% of the time against foreign competition (even when much of that competition is manufactured and built in America by American workers). I'm not sure what the answer is, but if the Democratic regime wants to bail them out, they sure need to do more than encourage higher fuel efficiency. Chapter 11 or 7 will allow them to possibly exit some of their disastrous labor and pension agreements, which are the real weights around their necks; perhaps the government could pick up the tab for the automakers increasing numbers of non-productive retirees and let them see if they can make it on their own.

5:21 PM  
Blogger Johnathan said...

The arrangements made with the unions are agreements made between the employer and employee, and those are committments that should be honored.

And they were being honored when business was good, but, as Brian notes, they produced inferior products that failed in the marketplace (hence Toyota's brilliant new commercial where it notes that all of its competitors compare themselves to their products ... so why waste your money on the imitation).

Consumers wanted higher fuel efficiency, alternative fuel options, higher performance and quality and affordability. Foreign products, largely Honda and Toyota, have been able to deliver those products.

We're all roughly arguing the same thing - that a poor product is not moving on the market, thus negatively impacting all areas of their business - but taking different angles on addressing said problem. I'm just not convinced we need to engineer some massive rescue plan for the auto industry unless it has the appropriate standards and requirements to ensure competiveness in the future.

Even then, I'm not convinced it's the right course of action.

7:57 PM  

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