General Motors is Not a “Significant Swath of Corporate America”
One of the great pathologies of the news biz is that there’s a structural incentive to overstate absolutely everything. Thus, Politico asserts that “Even as it gets set to announce the bankruptcy of General Motors Monday, the Obama administration is struggling to set parameters on how it will act after taking a 60 percent stake in the new company that emerges — and now that it has become the owner of a significant swath of Corporate America.” Conor Clarke points out that the government is, in fact, the owner of merely a trivial fraction of corporate America:
At any rate, Jon Cohn makes the case for the administration’s efforts and is fairly persuasive.
I wonder, however, about the international relations aspects of some of this. General Motors is now going to be majority owned by the US government with a substantial additional fraction owned by the Canadian government. There’s a fair amount of precedent for state-owned corporations (mostly from Europe, and most of it not very promising) but I’m not really familiar with much in the way of that sort of international joint venture. What’s more, no other country seems any more inclined to allow its car industry to go under than we are. But it’s hard to compete against rival firms that are getting government subsidies. Consequently, once you shift from a “nobody subsidized” equilibrium into an “everyone subsidized” equilibrium, it seems to me that it may be difficult to switch back. In principle, this is a solvable international coordination problem, but international coordination can be hard to pull off.
Meanwhile, it seems that the man now running the auto industry is Brian Deese who got his start right here at CAP/AF working for Gene Sperling.
61 Responses to “General Motors is Not a “Significant Swath of Corporate America””
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June 1st, 2009 at 4:02 pm
there’s a structural incentive to overstate absolutely everything.
I think you’re just exaggerating for effect.
June 1st, 2009 at 4:07 pm
In principle, this is a solvable international coordination problem, but international coordination can be hard to pull off.
How so? All the governments will agree to cut back production? Not likely. One or two governments will agree to let their companies go under? Er, also not likely. They all agree to phase out subsidies and sell stock? More likely, but you yourself said it “may be difficult to switch back.”
June 1st, 2009 at 4:13 pm
Consequently, once you shift from a “nobody subsidized” equilibrium into an “everyone subsidized” equilibrium, it seems to me that it may be difficult to switch back. In principle, this is a solvable international coordination problem, but international coordination can be hard to pull off.
Well, yes. Which for now kinda leaves us stuck with what is happening as the best of bad set of options.
That said, once the economy is creating a lot of jobs, we might take our chances with pulling out and seeing what happens.
June 1st, 2009 at 4:14 pm
What no comment on the shooting of an army recruiter? Is everyone trying to pretend that it’s only conservative that are violent.
June 1st, 2009 at 4:21 pm
i personally woulda gone ahead and pulled the plug on overcapacity now, which i actually think, DTM, is the best of a bad set of options, but i can see why people running for election wouldn’t agree with me.
but we’re going to have automobile overcapacity for a very long time into the future, and some future right-winger (let’s posit an american thatcher, for example) will use it as a club to beat off necessary regulation everywhere.
June 1st, 2009 at 4:21 pm
the troll says: Is everyone trying to pretend that it’s only conservative that are violent.
of course there was no hint whatsoever in that story about the motive of the shooter or the political leanings of any of the parties involved.
June 1st, 2009 at 4:23 pm
One bi-national industrial company that has made a good deal of news in the last few years by being very successful is Airbus. So, it has happened.
I also think that quite a few of the European and Asian companies that are state-owned or largely state-managed have done no worse than their privately-owned and operated competition.
both government and business seem to have their fair share of boneheads and geniuses among their executives.
June 1st, 2009 at 4:24 pm
It would be irresponsible not to speculate!
June 1st, 2009 at 4:25 pm
Yesterday people were calling Dr. Tiller’s killer a right wing terrorist before he was arrested so they were simply speculating about his motive. What I’m doing is no different.
June 1st, 2009 at 4:30 pm
i personally woulda gone ahead and pulled the plug on overcapacity now, which i actually think, DTM, is the best of a bad set of options, but i can see why people running for election wouldn’t agree with me.
As part of the bankruptcy, they are closing almost 1/3 of GM’s US plants. Don’t know how many more plugs you would have pulled, Howard, but it seems like the government is doing reasonably well on that front.
Has anyone made a reasonable defense of why the government dumped $30B into GM and Chrysler in December rather than just let them go bankrupt then? It was obviously dumb at the time and it’s still dumb, but no one seems to want to call either Obama or Bush out on it.
June 1st, 2009 at 4:30 pm
anon,
Your full of shit.
Tiller had been target for years by right-wing anti-abortion groups, he’d already been shot once before by them. His name was prominently featured on a wanted poster on Operation Resue’s site, etc. It was natural to assume who was repsonsible, which turned out to be correct.
June 1st, 2009 at 4:39 pm
brendan, airbus is one manufacturer in a two manufacturer industry, and even then they don’t have much of a return on capital. There is no reason to think that non-subsidized private businesses have fewer boneheads on average than boneheads in government or government subsidized businesses. There is substantial reason to think, however, that boneheads in government and government subsidized businesses have a much easier time, on average, in attracting more capital, primarily because they often really don’t need to attract it. They can compel that it be given to them.
Paying people to be stupid is bad enough. Being forced to pay people to be stupid is worse.
June 1st, 2009 at 4:43 pm
And the left wing has been vilifying military recruiters for year. Many prominent liberals think that our brave men and women in uniform are committing “war crimes”. It is only logical to thinks that this was an attempt by liberals to stop either “lying” or “war crimes”.
June 1st, 2009 at 4:49 pm
Actually this exercise in cronyism and government mismanagement is one big reason I voted for Obama. People keep thinking this kind of socialism is a good idea, and will do so until proved otherwise. So far,
* The established precedents of the credit structure have been demolished. This is why public investment ideas from the Obama admin have flopped.
* GM market value at it’s peak was $65 billion. Some $80 billion will be spent to save it.
* No one in the current Government has ever had a real job, much less run a company.
* We can anticipate USSR style efficiency and production, with unions in control of management.
So, I look forward to a slow motion car wreck sucking ever more taxpayer money into it’s vortex until even commenters here say “uncle”, and demand competence over politics. But, I expect it to take a while, during which I’ll be making money betting against whatever Obama thinks he can get away with. Right now, shorting treasuries is paying off really, really, well.
June 1st, 2009 at 4:50 pm
Meanwhile, it seems that the man now running the auto industry is Brian Deese who got his start right here at CAP/AF working for Gene Sperling.
That is truly frightening.
June 1st, 2009 at 4:57 pm
One thing I want to make clear: the guy who engaged in vigilante justice yesterday was not a terrorist, despite liberals attempting to dilute the term and slime their political opponents.
He was a misguided individual who pre-emptively defended the thousands of living, breathing babies that were going to be killed if the perpetrator wasn’t stopped. His methods are debatable, but his motives are not, unless Democrats want to apply that label to the entire pro-life movement. To compare him to terrorists like Bill Ayers or Chomsky is shameful.
June 1st, 2009 at 5:00 pm
Judd, it is astounding, isn’t it? It is akin to giving command of a carrier group to a a guy who has bloggged on military matters since graduating from college.
June 1st, 2009 at 5:02 pm
right, i’m no expert on auto production worldwide, but my general knowledge is that there is far more overcapacity than cutting 1/3 of GM’s plants alone will offset.
my general position is that, sooner or later, overcapacity will be squeezed out (or, who knows, maybe it will be carried until demand around the globe catches up but that global demand isn’t for american cars, by and large), and it’s unlikely that america’s value-add in global markets will reside in assembling automobiles. and therefore, i’d go ahead and step aside.
but as i say, i don’t have to face election, and i can understand why people who do face election want to punt the issue further down the road (and hope to get lucky in the interim).
June 1st, 2009 at 5:05 pm
I personally woulda gone ahead and pulled the plug on overcapacity now, which i actually think, DTM, is the best of a bad set of options.
The problem is that letting GM and Chrysler liquidate in this economic environment would end up throwing millions of people out of work in a time when there would be no other jobs for them to take. The government would then be left with a choice: take up the slack with direct aid, or let the economy get much worse to the detriment of us all. In contrast, by keeping them alive as going concerns, we can save the taxpayers a lot of money thanks to the revenues that go to the firm’s employees and the employees of their suppliers, which takes the place of what would otherwise have to be direct aid.
Has anyone made a reasonable defense of why the government dumped $30B into GM and Chrysler in December rather than just let them go bankrupt then? It was obviously dumb at the time and it’s still dumb, but no one seems to want to call either Obama or Bush out on it.
Again, because the alternative at the time was liquidation, which would have been a lot more expensive for the taxpayers and/or the economy.
June 1st, 2009 at 5:08 pm
I’m a liberal so I appreciate trying to make a point, but I think the chart is stupid. GM is not just another company. It’s still an enormous enterprise with thousands of employees. I work for a company that has 9 employees. How about a chart showing # of employees at “private” corporations who are now working for the government. It would still be a tiny sliver, of course, but it’s a more useful exercise.
June 1st, 2009 at 5:09 pm
right, i’m no expert on auto production worldwide, but my general knowledge is that there is far more overcapacity than cutting 1/3 of GM’s plants alone will offset.
Estimates vary, but roughly speaking you would have to wipe out just about every automobile made in the U.S. (by U.S. or foreign brands) to get the global automotive industry back to a profitable utilization rate. So these cuts are more along the lines of the U.S. doing its fair share to reduce capacity, as opposed to taking the entire necessary hit by itself.
June 1st, 2009 at 5:10 pm
“There’s a fair amount of precedent for state-owned corporations (mostly from Europe, and most of it not very promising) but I’m not really familiar with much in the way of that sort of international joint venture.”
Airbus (of EADS).
http://en.wikipedia.org/wiki/Airbus
http://en.wikipedia.org/wiki/EADS#Corporate_governance
June 1st, 2009 at 5:11 pm
Unfortunately, howard, chronic punting, over many decades, by auto executives and labor, is what led us to this state of affairs. Actually, I’d term our Post War economy the Punting Economy, in which actors from across the political spectrum punted one poorly designed policy, chock-filled with perverse incentives, down the field, in the hope that somebody would get lucky some day.
Muddling through is the best that can be expected, I guess.
June 1st, 2009 at 5:11 pm
By the way, to make something explicit:
The argument I noted in my 5:05pm post depends on the assumption the general economy isn’t creating jobs. Assuming we get back to an economy which is creating jobs, at that point you may be able to let the U.S. makers sink or swim.
June 1st, 2009 at 5:12 pm
“It is akin to giving command of a carrier group to a a guy who has bloggged on military matters since graduating from college.”
Your conservative compatriots saw no difficulty in handing over the entire government of Iraq to far less qualified people than Brian Deese. Quite the opposite, in fact.
In any case, Deese is Sperling’s protege – and Sperling was NEC chair for four very successful years. Summers seems to like Deese and Summers is the US de facto chief economist. Steven Rattner seems to like Deese and Rattner is one of the most important private equity players in the world.
June 1st, 2009 at 5:20 pm
Yeah, that was stupid. I expected the Bush Administration to do all manner of stupid things when waging war. That is what happens when wars are waged. Now the Obama Administration is going to do all manner of stupid things while managing the American auto industry.
You seem to think that the “accomplishments” you list are of note. Well, you just go right ahead.
June 1st, 2009 at 5:35 pm
DTM, we’re only engaging in hypotheticals here, of course, but i’d rather have seen a more aggressive stimulus and less involvement in GM and Chrysler than vice versa.
because the problem is – as will allen rightly notes – is that eventually, you can’t punt the problem any more. i’d rather – in a context of a larger stimulus package – have taken the hit and seen how the labor and capital could get redeployed during a period of economic transition anyhow.
burritoboy, trust me: i’ve had many, many, many a difference with will allen, but you aren’t going to scare him off by citing the usual right-wing crudities – you won’t get will to do anything but agree. were the american right today more like will allen and less like rush limbaugh, the country would be much better off.
June 1st, 2009 at 5:40 pm
In common usage, “significant” often means “big”. But it also can mean what it most literally means, that something signifies.
In this sense, Politico’s usage was very appropriate. The US’s ownership of GM is “significant”. It signifies quite a few things.
June 1st, 2009 at 5:48 pm
howard,
I understand that point of view, but I just don’t see how the timing could work. The stimulus is still just getting started, and won’t have its full effects for years. You could make that package bigger, but you can’t really speed it up too much–in fact, the bigger it gets, the more back-loaded it is going to be. Meanwhile, the liquidation of GM and Chrysler, and even the ripple effects through the suppliers and into other U.S. automaking operations, would likely happen very fast in comparison.
But anyway, I actually largely share your long term assessment, and for that matter Will Allen’s. And as you imply, we’ll never really know what else might have happened in the short term.
June 1st, 2009 at 6:10 pm
Judd, it is astounding, isn’t it? It is akin to giving command of a carrier group to a a guy who has bloggged on military matters since graduating from college.
I’m sure Yglesias just submitted his resume to be the “passenger train czar.”
June 1st, 2009 at 6:17 pm
That’s pretty funny.
June 1st, 2009 at 6:39 pm
DTM, part of what makes it unknowable is trying to guess how a non-government-shaped bankruptcy would look, which would speak to just how severe the unemployment ripple would be. like i say, faced with an election, i’d probably do what the obama administration is doing….
June 1st, 2009 at 7:00 pm
“You seem to think that the “accomplishments” you list are of note. Well, you just go right ahead.”
Yes, I think they’re of note. It’s the judgement of Gene Sperling, Larry Summers and Steven Rattner that Deese is a good pick. While I don’t think they’re infallible, they’ve shown a reasonable amount of good judgement in the past. It’s not like the auto industry executives particularly covered themselves in glory, either, so why would we believe that experience in the industry adds much value in this environment?
June 1st, 2009 at 7:03 pm
Again, because the alternative at the time was liquidation, which would have been a lot more expensive for the taxpayers and/or the economy.
Liquidation was no more an alternative then than it is now. GM and Chrysler claimed they’d have to go Chapter 7 because no DIP financing was available. Guess what — there’s still no DIP financing available but they’re both in Chapter 11 because the US government is providing the financing. Why didn’t we just do this in December/January?
June 1st, 2009 at 7:08 pm
burritoboy, for some reason you have created a dichotomy between “auto industry executive” and “someone who has never successfully managed a huge bureaucracy”.
Look, there is chance that the guy will be the rare person who delegates effectively in a role in which he has zero experience. However, the sort of person who endeavors to have a long career in Washington D.C. is usually not given to a frank and honest assessment about his limitations, with an appropriate strategy to counteract them. The town tends to revard people who appear to know more than they do.
June 1st, 2009 at 7:20 pm
One thing Mr Yglesias has not yet addressed is the politicization of the closings of auto dealerships. It appears that the dealers that Obama chose to shut down had a very partisan breakdown. Indeed, statistical analysis shows that he targeted in some cities Republican donors and Hispanics and favored Clinton donors, perhaps as monetary payback for turning around to support him after his sexist attacks in the primary.
Where is the transparency for how and why Obama decided to do this? And why is Mr Yglesias trying to bury this story?
Is this change we can believe in?
June 1st, 2009 at 7:20 pm
State-run enterprises have often failed to fulfill their promise, but most readers here seem to think this is not true of private companies. as a matter of fact, ALMOST NO substantial private industry in america has made it without heavy government support. this goes for utilities (or sports leagues) granted monopolies, railroads that got their start through astoundingly huge governement granst of land, Henry Ford and GM, who were rescued in the depression by staggeringly large Air Force contracts and then who had what sometimes seems like the whole country paved over for them through US hways, and when that wasn’t enough, the Interstates (this is ignoring GM’s entirely corrupt method of getting almost every municipal bus contract in the 40’s and 50’s–ask your neighborhood transit historian why America’s trolleys disappeared), and as for the airlines, and the airplane mfrs who supply them? don’t even go there.
oil depletion allowance and production tax credits for oil and gas, mortgage interest tax deduction for the construction industry, etc. etc. Wanna discuss agribusiness and irrigation?
the silicon valley nerds and the entertainment industries have had their riches enlarged greatly by the fix the government arranged for them a few years ago on copyright law. And so on.
this is how wealth is created.
i do not contend that every private fortune in america was made with the taxpayers’ money, nor that there has not been or is not still much great creativity and productivity in the private sector. Of course there is. to contend otherwise would be stupid.
but equally stupid is to think that ‘private’ efforts are all that keeps that sector going, or even–for many quite enormous and powerful industry segments–that the sector would resemble what we see today if it weren’t for the INTERSECTION of public and private that makes for a healthy economy.
the recent wall street meltdown is the best illustration of why government, even in its most ‘restrictive’ mode, namely, regulation, is essential for wealth creation and protection.
so let’s stop with this stupid, smug, annoying presumption that business is best left to businesspeople, and government sucks. that’s how we got into this mess.
They ALL suck, if we are not watching, complaining, seeking accountability and all that all, all the time.
June 1st, 2009 at 7:33 pm
We can anticipate USSR style efficiency and production, with unions in control of management.
Hopefully we’ll at least get some awesome concrete-block style modernist buildings out of the deal.
oh yeah, statues of Lenin too-those are cool for the kische value alone.
June 1st, 2009 at 7:41 pm
DTM, part of what makes it unknowable is trying to guess how a non-government-shaped bankruptcy would look
True, but I think it is extremely likely no one but the government would have been willing to step forward with the necessary financing to keep them out of liquidation. Speaking of which . . .
Liquidation was no more an alternative then than it is now. GM and Chrysler claimed they’d have to go Chapter 7 because no DIP financing was available. Guess what — there’s still no DIP financing available but they’re both in Chapter 11 because the US government is providing the financing. Why didn’t we just do this in December/January?
Well, in some sense we have been doing this since at least Obama took over: the Obama Administration has been working with the management on restructuring plans, negotiating with various stakeholders, and so on. Bankruptcy is just the last stage in this process, and it is necessary just because a few creditors wouldn’t sign onto the deals. So, they need a court order to wrap everything up.
June 1st, 2009 at 7:55 pm
It appears that the dealers that Obama chose to shut down had a very partisan breakdown.
People who actually understand statistics have looked at this issue, and it turns out that car dealers are just disproportionately Republican donors to begin with. We are now into the second round of this, and it has developed into a classic case of the Texas Sharpshooter Fallacy, aka data dredging. Anyway, here is the latest from Nate Silver:
Nate Silver on Car Dealerships
And a little on the Texas Sharpshooter Fallacy:
Texas Sharpshooter Fallacy
June 1st, 2009 at 7:56 pm
DTM, exactly, so the unknowable questions become what happens in liquidation? how quickly did they go into liquidation? are there surprisingly buyable pieces that would justify quick vulture deals?
it could well be the answers are they went into liquidation quickly, there were no quick sales, and a disorganized untidy mess resulted to put another hole in demand, at which point you are correct that the cost is quite high, but i at least suspect (well, maybe i hypothesize) they slow-walk their way into liquidation, selling off parts and pieces in an increasingly painful-to-watch but slow death spiral that isn’t nearly as economically catastrophic and keeps us out of the long-term albatross that is government motors….
June 1st, 2009 at 8:17 pm
but i at least suspect (well, maybe i hypothesize) they slow-walk their way into liquidation, selling off parts and pieces in an increasingly painful-to-watch but slow death spiral that isn’t nearly as economically catastrophic and keeps us out of the long-term albatross that is government motors
What it really would have depended on is consumer behavior. The scenario everyone was afraid of was that GM and Chrysler sales would more or less come to a complete halt, and there was decent reason to believe this would happen if they had entered bankruptcy without explicit guarantees from the government that they would exit as going concerns. For example, this is basically what consumers said they would do in surveys (rule out buying a new car from a company going bankrupt). It is also what happened when car companies went bankrupt in the past (see, e.g., Daewoo). It also makes perfect sense: things like warranties, the future availability of parts and service, and resale markets are crucial to selling new cars, and none of that could be counted on if there was a substantial chance of the car company disappearing.
Again, we’ll never know for sure what consumers would have done. But if this sales freeze had happened, then the only possible scenario would be a quick, messy, and destructive liquidation–these companies simply didn’t have the cash or credit to survive any length of time with no sales. And the same goes for most of the suppliers.
So I guess one way of summing all this up is that at a minimum, there was a very substantial risk of all this happening. And for a few billion dollars (some of which we may even get back), that was a risk well worth avoiding–or at least that is the argument.
June 1st, 2009 at 8:18 pm
I wish the left would go ahead and decide what it is. When it suits them “GM is a vital part of our economy that must be managed by the Government.” When it doesn’t, “GM is a trivial afterthought in a dysfunction American car industry.”
June 1st, 2009 at 8:55 pm
The point, brendan, is that the more any large bureaucracy can obtain capital via taxpayers/Congress, instead of obtaining capital from investors or customers who part with it voluntarily, the more likely it is that poor use of the capital will be tolerated, thus allowing still more capital to be squandered. Enron was discovered to be a cesspool of bad capital management. It ceased to exist, because no person would supply more capital. The Bureau of Indian Affairs consinues on, one corrupt decade after another.
Yes, there are other ways in which Congress can favor an industry, such as intellectual property protection, and sure enough, the practice is abused to the detriment of society. As to regulation, few things are more predictable than regulatory capture, resulting in the entity which was to be reigned in by government, thus protecting the public, instead using state power to harm the public. No, this does not mean that all efforts to regulate should be abandoned, but it does suggest some hard nosed realism is in order regarding whether the more elaborate regulatory schemes are likely to provide more benefit than cost. As a general rule, regulation which promotes transparency tends to fufill it’s goals best.
Unfortunately, we have now fully adopted the too big to fail concept, so now Congress supplies capital to bureaucracies that no sane individual would supply individually. The odds of GMs culture being sufficiently modified to guarantee long term viability, while Congress enables bad behavior is slim. Everyone cites the first Chrysler bail out as a success, as if giving the cash needed to avoid a reckoning with long term issues, resulting in another bail out 30 years later, was a good idea, because the fist bail out was paid back with interest. If you don’t think the first Chyrsler bail out taught lessons to GM and the UAW, lessons whose invoices have just arrived in the mail, you are mistaken.
Corporate income taxes are normally a bad idea, since they are just a means for Congress to obscure whether it is taxing shareholders, employees, or customers. However, if the too big to fail concept is with us, then let us have a tiny or even nonexistent tax on firms which are small enough to fail, and a large one on firms which are receiving implicit taxpayer backing.
June 1st, 2009 at 9:07 pm
I wish the left would go ahead and decide what it is. When it suits them “GM is a vital part of our economy that must be managed by the Government.” When it doesn’t, “GM is a trivial afterthought in a dysfunction American car industry.”
Here is a crazy thought. Maybe “the left” is not some monolithic hive-mind, and instead various people you associate with “the left” are actually taking different positions.
June 1st, 2009 at 9:11 pm
In 2006 Ford Motor Company mortgaged all it assets (even their blue oval logo) to raise money for their reorganization plan, in a risky bid to remake itself. They didn’t wait until it was too late and they didn’t ask for a government bailout.
Their reward is seeing how its main competitor GM gets $50 billion dollars in taxpayer bailouts. I’m bullish about Ford and I admit that I always have a soft spot for that company being a Mustang fan. The Ford Fusion is a great car and the new 2010 Taurus looks like a sure hit… but, will the competition between Ford and GM (and whatever is left of Chrysler) be a fair fight?
Will a menagerie of leftist and communist (as a certified wingnut I’m required to use that word went posting here) such as those populating this site care to recognize that this is unfair? Ford did the right thing, in this country we are supposed to reward risk takers and people with vision. Ford had it. GM and Chrysler didn’t so… lets bail them out and Ford..? Eff them!
June 1st, 2009 at 9:25 pm
Yep, that is the bad part of this I forgot to mention. Ford’s employees and shareholders, and maybe their bondholders, have been screwed.
June 1st, 2009 at 10:11 pm
It is only logical to thinks that this was an attempt by liberals to stop either “lying” or “war crimes”.
STFU, troll
June 1st, 2009 at 10:13 pm
Ford’s interest in all this is more complicated than some people apparently think. Ford, GM, and Chrysler have enough suppliers in common that GM and Chrysler liquidating could well take Ford down with them. Similarly, a sufficiently depressed economy is also bad for Ford. That is why Ford has consistently supported the bailout of GM and Chrysler, even while refusing a bailout itself. See, for example, here:
Ford on GM/Chrysler Bailout
And here is what they just said today:
Ford on GM Bankruptcy
That said, obviously Ford would love to take marketshare from GM and Chrysler, and conversely Ford could ultimately fear losing market share to GM and Chrysler if they perpetually enjoy access to the government’s cheap cost of capital. That is what “not changing the industry’s competitive dynamics” means–although again, obviously they would be fine if it was changed in their favor.
So to sum up, the ideal outcome for Ford would be GM and Chrysler surviving, but in a somewhat smaller and/or weakened state. And so far, it doesn’t seem impossible Ford will get something pretty much like that.
June 1st, 2009 at 10:23 pm
There is that aspect, of course, but it is hard to believe that there would have been no money to make by supplying Ford alone, with new labor contracts and the assets under new management. I dont blame Ford for not wanting to find out, however.
June 1st, 2009 at 10:29 pm
By the way, my favorite line on this, from Michael Steele:
Um . . .
June 1st, 2009 at 10:39 pm
There is that aspect, of course, but it is hard to believe that there would have been no money to make by supplying Ford alone, with new labor contracts and the assets under new management.
First, due to industry-wide overcapacity, GM and Chrysler’s automaking assets would have just disappeared.
Second, their market share would not have gone exclusively to Ford: it would have been spread around the remainder of the industry.
Third, the U.S. suppliers had themselves been squeezed down to tiny margins and limited reserves due to overcapacity and hypercompetition in the auto industry.
Add that together, and many of the U.S. suppliers could not have survived a transition to a world without GM and Chrysler, and thus neither could Ford. Instead, the U.S. suppliers’ overseas competitors, serving overseas automakers, would have gladly taken their place. In other words, a lot more Americans would have been buying imported Volkswagens, and millions more Americans would have been out of work.
Which may be the future anyway, but as noted above, just delaying the timing was likely worth it.
June 1st, 2009 at 10:56 pm
If a company’s margins are too small, it may need to cut costs. Sounds like a good argument for reorganization, and new labor contracts.
Look, I underestand your point, but arguing that Acme Widget has to be saved, because Acme’s suppliers are critical to Acme’s competitor, is a bit much. I’d rather just finance the purchase of the suppliers, at a bankruptcy price, by Acme’s competitor. The competitor will have less pressure on his margins, and the taxpayer is paying for less overcapacity.
June 1st, 2009 at 11:17 pm
International joint ventures: EADS (Airbus), and the European space program.
June 1st, 2009 at 11:52 pm
While we as a country continue this sad, petty, self-defeating squabble about what the government’s role is in the National economy the Chinese are racing past us in every conceivable industry and leaving us in the dust.
Consider electric automobiles. Electric cars WILL DOMINATE the world auto market by the year 2020. The Chinese government understands this -as they should, they govern over the planet’s largest potential market- and have been subsidizing and promoting the electric cars produced by their automakers for the last half-decade.
Next year a Chinese company, BYD, will begin the planet’s first mass sales of an electric car. The Chinese government will buy a significant proportion of BYD’s initial production and is building the infrastructure to support the roll-out -charging facilities and battery changing stations.
The Chinese government understands that by supporting this new technology in such a fashion it allows them, as a Nation, to take a quantum lead in what will undoubtedly become the world’s next great industrial enterprise, the building of electric cars and the requisite infrastructure to support them.
Not only that, but by becoming the world’s leader in electric car production -the Chinese have already forged ahead of all other nation-states in clean energy endeavors such as the building of maglev trains, high speed rail networks, and wind energy facilities- they may soon become “the voice” on Global Warming initiatives, impossible as that sounds now.
If China becoming a clean country seems like a crazy fantasy, remember, things happen almost exponentially fast in China. Their government can, through central planning, condense 100 years into ten.
Consider. In the year 1999, China did not have high speed rail. By the year 2013, they will have thirty-four (34!) HSR lines of at least 100 kilometers in length. Eight of those HSR lines will be longer than 400 kilometers and three HSR lines will stretch 800 kilometers in length or more.
In other words, a massive high speed rail network will have been constructed and laid down in less than fifteen years. Incredibly, dozens of other HSR projects are on the planning boards or under construction. China can literally change the face and direction of its country in ten years, and is doing so.
Consider. BYD was started by a young entrepreneur, Wang Chuanfu in 1995, in an old government warehouse. By 2001 it was the world’s leader in the sale of lithium batteries. It did not start building cars until 2004, and now, five years later, thanks to a symbiotic relationship with its government, BYD has become the world’s number one manufacturer of the planet’s next great industrial product -electric cars.
June 2nd, 2009 at 12:43 am
I worked for Ford in my previous life, and I’m now retired from Ford, so I depend on Ford staying out of Chapter 11 for roughly 2/3 of my pension (special early retirement = unqualified plan = unfunded under tax rules) and for all of my medical until Medicare kicks in.
Ford (viewed from afar now) seems to have a complicated relationship with these problems. Yes, Ford Treasury was smart enough to arrange for as much liquidity as they could before the problems hit, but now Ford will be paying for that liquidity while Chrysler has its similar secured debt converted to equity in bankruptcy. Having said that, Ford recently arranged a debt-for-equity swap that will save them tons in interest in the future.
While it’s possible that many or most suppliers could survive liquidation of GM and Chrysler, if a key supplier of just one part (let’s say whatever company is supplying seats for the F-series or Fusion) went out of business Ford would be screwed. It’s not an easy or quick matter to switch suppliers for certain uniquely designed parts (thinking particularly seats and other interior bits) once the model is in production. So, to that extent, Ford needs GM and Chrysler to continue in business for the time being. An orderly reduction in GM/Chrysler’s production is the best result for Ford.
Now, GM potentially having access to some of the world’s cheapest debt is a problem, but the track record of governments owning car companies is, well, mixed. French government ownership of Renault was successful in turning the company around, but British government ownership of British Leyland is legendary in its disastrousness (after years of disaster under private ownership, it should be said). No doubt GM has plenty of good car guys and women at all levels of the organization, and if they’re turned loose they could produce world-beating products. The question is whether they’ll be allowed to.
June 2nd, 2009 at 5:56 am
I don’t know why people assume GM and Chrysler will have continued access to cheap capital. Shareholders and bondholders took an enormous hit in those bankruptcy preceedings so the government has made it clear that you can’t just assume loans to those government owned companies are now government guaraunteed. Also, the fed specifically forced GM and Chrsyler to significantly cut capacity as part of the deal.
If I’m a Ford shareholder, bondholder, executive or worker, this worked out as well as it could have. GM and Chrysler stay alive, keeping my supply chain in business. Their capacity is cut, which gives me an opportunity to increase market share. And Ford didn’t go through a bankruptcy proceeding that would have cost everyone involved a lot of money. If Ford runs into trouble n the future, I think they will also get bailed out. It won’t do the shareholders or bondholders much good and the worker’s unions will probably suffer some, but at least they’ll keep most of their jobs. But if they can avoid it, everyone with an interest in Ford will come out way better than those associated with GM or Chyrsler. Ultimately, I think this is their best case scenario, short of free government money (which is very notably what GM and Chrysler did not get).
June 2nd, 2009 at 7:41 am
If a company’s margins are too small, it may need to cut costs.
The reason for the small margins was overcapacity in the global automotive market: indirectly, U.S. suppliers were competing with suppliers in Europe, Asia, increasingly South America, and so on, and the only real solution was a global capacity reduction. In any event, that is all irrelevant, because the question is whether the suppliers could have survived a sales freeze at GM and Chrysler, and consequently a sales freeze of parts to GM and Chrysler. And the answer, in many cases, would have been no–unless they got a bailout themselves. Speaking of which . . .
I’d rather just finance the purchase of the suppliers, at a bankruptcy price, by Acme’s competitor. The competitor will have less pressure on his margins, and the taxpayer is paying for less overcapacity.
So this would end up much more expensive for the taxpayers (thanks to the large portion of GM and Chrysler sales that end up as purchases from suppliers, and the fact that only a fraction of those sales would divert to Ford). Moreover, this would represent not just neutral treatment of Ford, but highly favorable treatment of Ford. So I fail to see the advantage on either practical or moral grounds.
June 2nd, 2009 at 12:22 pm
[...] Matthew Yglesias [...]
June 2nd, 2009 at 12:43 pm
Well, I tend to highly favor people who run and work for businesses with better balance sheets and/or cash flow. Call me crazy.
Your projections about cost to the taxpayer entail a assumption of future decisions in the industry being made on an economically rational basis. The likelihood of this assumption bearing out is exceedingly slim, as any examination of other industries so closely tied to Congressional involvement. Just wait until the John Murtha GM plant opens in Pennsylvania, next to the John Murtha International Airport. It’ll make 20 cars a day, while employing 1000 constituents, er…autoworkers.
June 2nd, 2009 at 2:06 pm
What’s more, no other country seems any more inclined to allow its car industry to go under than we are. But it’s hard to compete against rival firms that are getting government subsidies.
If your car industry can only exist on government subsidies – in other words, making and selling cars at a loss and living off taxes collected from the rest of your economy – then how does it benefit your country to keep it on life support? Invest in some industry where there isn’t massive global overcapacity, it’s more profitable for your country’s private *and* public sectors.
Of course, this means worker retraining – economic dislocation is always unpopular – but in the long term it seems like whoever shifts away from subsidizing overcapacity will profit.