In his column today on the GM bankruptcy/acquisition by the U. S. government David Brooks lists six reasons the Obama Administration’s plans for GM will fail:
First, the Obama plan will reduce the influence of commercial outsiders. The best place for fresh thinking could come from outside private investors. But the Obama plan rides roughshod over the current private investors and so discourages future investors. G.M. is now a pariah on Wall Street. Say farewell to a potentially powerful source of external commercial pressure.
Second, the Obama plan entrenches the ancien régime. The old C.E.O. is gone, but he’s been replaced by a veteran insider and similar executive coterie. Meanwhile, the U.A.W. has been given a bigger leadership role. This is the union that fought for job banks, where employees get paid for doing nothing. This is the organization that championed retirement with full benefits at around age 50. This is not an organization that represents fundamental cultural change.
Third, the Obama approach reduces the fear that impels change. The U.S. government will own most of G.M. It would be politically suicidal for the Democrats, or whoever is in power, to pull the plug on the company — now or ever. Therefore, the current managers can rest assured that they never need to fear liquidation again. There will always be federal subsidies for their own mediocrity.
Fourth, the Obama plan dilutes the company’s focus. Instead of thinking obsessively about profitability and quality, G.M. will also have to meet the administration’s environmental goals. There is no evidence G.M. is good at building the sort of small cars the administration demands. There is no evidence that there is a large American market for these cars. But G.M. now has to serve two masters, the market and the administration’s policy goals.
Fifth, G.M.’s executives and unions now have an incentive to see Washington as a prime revenue center. Already, the union has successfully lobbied to move production centers back from overseas. Already, the company has successfully sought to restrict the import of cars that might compete with G.M. brands. In the years ahead, G.M.’s management will have a strong incentive to spend time in Washington, urging the company’s owner, the federal government, to issue laws to help it against Ford and Honda.
Sixth, the new plan will create an ever-thickening set of relationships between G.M.’s new owners — in government, management and unions. These thickening bonds between public and private bureaucrats will fundamentally alter the corporate culture, and not for the better. Members of Congress are also getting more involved in the company they own, and will have their own quaint impact.
Let me list another one:
Hat tip: Felix Salmon
This chart shows car sales and the trend in car ownership in the United States over time. That swoop at the right end represents the current predicament for the auto companies. Felix goes on to explain:
Still, check out this league table: the US has vastly more cars per 1,000 people than any other major nation. Canada, for instance, has only 563 vehicles per 1,000 people — less than three-quarters of the US figure. For America to even approach that level would be unprecedented in living memory, but there’s really no particular reason why the average American needs 36% more cars than the average Canadian. If you’re losing say 15 cars per 1,000 people per year, it would take over 14 years to get down to Canadian levels of car ownership.
Those who are saying that the current level of fleet replacement is “unsustainable” are dead wrong. The experience of every other industrialized nation demonstates that it can be sustained and the current economic conditions suggest that it will be sustained.
Unless things change that suggests that car sales could be very, very slow in the United States for the foreseeable future. There are any number of factors which could alter this pattern. Increased consumer confidence could buoy car sales. Interests are already nearly zero (for those who can get loans) so there isn’t any room for falling interest rates to spur increased sales. A return to booming housing values could do the trick. Robust real wage growth over a broad swathe of the population could do it. Does anybody honestly see any of those things happening for the foreseeable future? I don’t. Quite to the contrary I envision slow growth or none at all.
To add insult to injury expect cars made in India and China to enter the U. S. market over the next few years. India’s Tata Motors didn’t buy Range Rover for the fun of it. They were looking for a dealer base for marketing their own products. If they’d waited a little longer they could have bought one on the cheap.
All of those factors taken together means that we’re over-producing automobiles in this country to the tune of between 30 and 50%. I’ve already made this point in comments but I’ll make it again. That 30 to 50% is simply not to be had. It’s gone. Given that reality the alternative response are to
- Subsidize the weakest companies thereby reducing the prospective sales for the stronger companies.
- Divvy up the available market amongst the weak and strong according to some sort of government-managed fiat system. Not only would this weaken the strong while not solving the problems of the weak the resultant deadweight loss would further depress car sales.
- Let GM and Chrysler fail thereby maximizing the likelihood of the survival of auto manufacturing in the United States.
As David Brooks points out the Democratic Party has now placed itself into a position in which it cannot allow GM to fail regardless of the implications.
Update
There’s one more thing I wanted to mention that I didn’t bring out in the body of the post. This isn’t harmless. Wasting resources by throwing them at moribund car companies that in all likelihood are incapable of change not only dilutes the strength of the automobile industry as a whole it takes needed resources away from other sectors of the economy. And let’s face it: the automobile sector isn’t going to be the engine that creates the jobs of the future or drags the economy out of the doldrums. Other sectors will need to do that. Resources are limited. We’d be better off supporting sectors of the economy that had some hope for the future.
I would add that I believe what is happening is also alienating GM’s more traditional demographic. I assume a large chunk of their loyal customer base are Buy American people, who are likely to find government ownership to be, er, too foreign.
In our household we have three drivers and three cars. It would be very simple for us to downsize our “fleet” by 33% by simply not replacing one of the three cars when it wears out (probably the Chrysler Minivan with 145,000 mi). We own two Chrysler products and one Chevrolet. We will not buy again from these companies until the government is out of their ownership picture. We regret that it is becoming anti-American free enterprise to buy American.
SAJ’s point is perhaps one of the saddest expressions of unintended consequences of Obama-land.
I wish I could say SAJ is an outlier. However, I’ve heard this sentiment expressed many times recently.
Where are the votes to exit this disaster?
I have bought three new G.M. cars in the last ten years. Buying an American car has been infused in me from my family, particularly my paternal grandfather (WWII vet) and my maternal grandfather (union pol). I can’t describe the preference rationally, since I am a free trader and the meaning of American-made has become obscured. But I don’t see my next car being particularly from any country. That preferential link just doesn’t exist in me any more .
No one is going to make their car-buying decisions based on the degree of government ownership. That goes in the same box as people who are going to leave the country if this or that candidate wins.
People will buy the best car they can afford regardless of origin or corporate structure. You know anyone who cares that VW is partly owned by the government of Lower Saxony? Somehow it didn’t figure in my decision to buy an Audi.
Make good cars for a good price and people will buy them. Don’t and they won’t.
I have no idea what other people will do. I do know that we probably won’t be buying any cars for a decade or more.
As far as I’m concerned there are only two sensible strategies for buying cars. The first is to buy the car new, pay it off as quickly as is reasonable, and drive it until the cost of repairing it exceeds car payments on a new car.
The other strategy is to buy the best car with the best resale value that you can afford used with no more than 35,000 miles on it, drive it until it reaches about 50,000 miles, and then sell it.
We follow the first strategy. We drove our last car, a Volvo, for 20 years before repairing it stopped making sense. However, I’ve known people who’ve followed the second strategy very effectively.
don’t get out much, do you, michael?
Dave:
People aren’t necessarily sensible. Or at least they often operate on not-entirely-rational premises. I could easily drop down to a single car — neither of us drives to work. The chances of me doing so? Zero.
I drove a Dodge Dart when that’s all I could afford.
I drove a Taurus when Ford unexpectedly (and unjustifiably) gave me credit.
I drove an S 500 when I could afford that, because I’d been poor for a long time and enjoyed driving an expensive luxury car.
I bought a RAV 4 because it was the biggest thing I felt I could take with me and drive on tight Italian roads.
I bought the Audi because it had great crash numbers and I have kids, and because I could drive it to Hollywood for a meeting and not be ignored by valets.
Criteria change depending on where I am, what’s going on, the kids, the second car . . . But I’ve never even thought about who owned the corporation.
If GM meets some as-yet-undefined need, I’ll buy one of their cars. For example, if they come up with a genuine four-seater convertible that has some power and style? I’m all theirs.
PD:
A YouTube of me “getting out much.” The places I’ve lived for six months or more. Note that some locations I lived in more than one home, or on more than one occasion.
http://www.youtube.com/watch?v=2pMgXjTsqeY
Lot of places you flew over michael.
PD:
Dude: “places I’ve lived for six months or more.”
Sigh, it’s no fun when the jabs aren’t even recognized.
Look, I can have this conversation with about 30 cousins and 30 neighbors who start their car buying decision with this question: What AMERICAN car am I going to buy? You are not one of these people. You seem to not even know that such people exist, let alone have any insight into their thinking.
PD:
GM’s gone from more than a 50 market share to less than 20. The whole time there were people claiming they’d only buy American.
I don’t believe that’s how decisions are made. I believe that’s how decisions are rationalized or advertised. And I don’t think people who want a GM car will refuse to buy one because the USG is a shareholder. I think that’s just a pose.
But there’s not much point in arguing about it. We’ll see soon enough.
One anectodal point of data: My local newspaper has been running full page ads from an aggrieved dealer who had three of his four Chrysler franchises cut. Granted his bias, but he does present data to make the point that Chrysler’s decision made no sense and was the result of the government getting involved with a business they know nothing about. By the way, he sells Fords too. Chrysler should sue him if his data is wrong; they should cancel his fourth franchise in any case. I think this stuff is pretty deadly given the role of the dealer as the face of the franchise.
On that subject one thing that’s worth repeating: automobile manufacturers are original equipment manufacturers. The dealers are their customers. End-users, i.e. people who buy automobiles are not the auto makers’ customers.
For an auto maker cutting its dealers is reducing the number of its customers. I have yet to hear a rationale for doing this that isn’t very strained. I suspect it has more to do with state regulations on the relationship between the auto makers and dealers than it does with creating and maintaining a robust automobile industry. It might even be that changing the laws would be a significantly better way to achieve the desired objective than cutting dealers.
They could have used bankruptcy reorganization to rewrite the franchise agreements with new performance obligations on the dealers that reflected anticipated market conditions. In doing so, they could have discharged state franchise law obligations. The dealers that didn’t like it could have opted out and become unsecured creditors for any losses. This would have taken more time than the quickee process being used.
Same is true with the union contracts.
As David Brooks points out the Democratic Party has now placed itself into a position in which it cannot allow GM to fail regardless of the implications.
This wouldn’t be so bad if this millstone were tied around the neck of the Democratic Party. But they’ve tied it around the neck of the nation as a whole. But what the Hell, what’s one more millstone when we’re already loaded down with a megaton of granite?