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To Bailout GM or not? November 13, 2008

Posted by shaferfinancial in Uncategorized.
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Once upon a time, the failure of GM would have been unthinkable.  Their size and importance to the economy could not have been understated.  In front of congress, Charles Wilson, CEO of GM famously quipped, “I cannot conceive of one because for years I thought that what was good for our country was good for General Motors, and vice versa.”  He followed that sentence up with: “Our company is too big. It goes with the welfare of the country.”

But does that statement in 1953 have a truth to it in 2008?  Well, no.  Far from being the nations biggest employer like it was in 1953, GM employs 266,000 people.  Compare that to the 2.1 million workers Wall Mart employs.  What it is, unfortunately, is the main employer in some Midwestern towns, that are on the verge of collapse because every other business has left town.  It is really no different than the steel industry when it collapsed or the textile industry when it collapsed.  Its business model no longer makes sense.  In short, its products are no longer competitive, and a business model dependent on heavy lobbying, questionable advertising claims, and high internal costs from the management and the workers salaries, is failing.

So should we throw money at GM?  In my mind no.  Now some will say this is a heartless decision that makes no sense in a recession and in the light of banking bailouts.  But unlike the banking bailouts, which is likely to actually make money for the government, any cash thrown at GM will likely just go down the drain and put off the inevitable.  After all the Japanese, Korean, and German car manufacturers are not on the verge of bankruptcy.  Let them go into bankruptcy reorganization.  Allow a new and more nimble company emerge.  Fire the management and find some wealthy CEO who would take on the challenge (Friedman suggests Steve Jobs of Apple) of the reorganization.  Many of those workers would find jobs in the new GM, while others will be forced to find jobs in other companies or industries.  There factories are state of the art, so they will find offers for them or can be used to produce the new GM cars.  Unfortunately, the union pay will have to find equilibrium with the non-union pay at places like Toyota.  And the pension fund (we don’t know how well it is funded right now, but the company says it is appropriately funded) would be taken over by the government.

I bought my first hybrid car over five years ago.  About the same time, I went public on several different forums about my disgust with the GM management and their attitudes toward gas mileage.  I predicted then that they would drive themselves out of business.  I had no clue it would happen so fast.  I also had an issue with the GM credit card my mom had when she died.  GM credit turned her over to a collection agency over a $25 payment that was 3 days late.  By the time I realized it (I had to take over the bookkeeping for my parents abruptly) that late payment had ballooned to $420 bill (5 months).  Any company upon hearing the story of a dead parent (and realizing they had no recourse) would have been more sympathetic, but not GM credit.  They called her a deadbeat (they were half right!) and wanted their money.  The best was when the collection person told me her credit score would be destroyed :-).  I swore at that time I would never own a GM car again (we had one in the driveway at the time) Any way, that was just a couple of personal examples of why GM doesn’t deserve our money.  Let them fail like my business will if I can’t find customers to pay my costs.

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Comments»

1. adam Hartung - November 13, 2008

If America bails out GM and/or Ford we should demand a change in the leadership and management teams. Until someone Disrupts these companies and changes their management approach these companies will not be viable competitors. Read more at http://www.thephoenixprinciple.com

2. adam Hartung - November 14, 2008

GM’s problems are only somewhat the economy. Their biggest problem has been Lock-in to old concepts of their market, and a horribly locked in maanagement, leaving them vulnerable to market shifts that started in the 1980s and are now driving all the profit out of their old business model.

3. conservativist - November 14, 2008

Good write up. I also wrote about the potential bailout of the Automakers on my blog – http://conservativist.wordpress.com/

4. shaferfinancial - November 14, 2008

I believe that the government bureacrats are doing what they always do; looking out for themselves and their re-election abilities. Having said that, it looks like some sense is entering into the debate. About time. No more blank checks. No more bailing out everyone.

5. Tom Vanderwell - November 16, 2008

David,

Well said. Enjoy the vacation!

Tom


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