Auto Industry Bailout - Supplement

On November 16th I published a post indicating I had very mixed feelings about a federal taxpayer bailout, but could reluctantly support one along the lines suggested by President-Elect Obama with some additional conditions. It now looks virtually certain that bailout legislation will be seriously and urgently pursued, based on a scheduled meeting next week between key members of Congress and the three major company CEO's who will supposedly be presenting their plans for the U. S. industry's rescue and restructuring.

Industry spokespersons over the past week have been claiming that one or more of the big three companies may run out of money as soon as the end of December, much sooner than previously represented and thereby underlining their case for increased urgency for the prospective bailout. I'm skeptical of the validity of the timing claim, but it's indicative of the obviously poor senior management and board of directors performance over many years. As I commented in my very recent post on the pending Citigroup bailout, the Bush Administration and Congress, as well as Obama's transition team, which certainly will be involved, any bailout plan must include a significant number of appropriate key personnel changes on the management teams and on the boards, especially for those members who have been serving for several years or more. This is a no-brainer and hopefully will be acted upon!

The evidence of the incredibly poor management and board performance is everywhere to be found, has been going on for decades, and is definitely not primarily due to the current eonomic recession and financial crisis, though those have greatly harmed the industry and accelerated their present dire position. Of course, one of the more important early evidence components was their overly generous, poorly negotiated labor agreements with the United Auto Workers, which has significantly impaired the industry's ability to compete well with several foreign manufacturers, primarily those in Japan and South Korea, with Toyota clearly being in the lead among those. Another obvious piece of evidence is their sizeable loss in marketshares, their poor operating performance and greatly reduced stock prices in recent years.

I can also point to their marketing and advertising strategies. Earlier this year on a three week trip to the Midwest, my wife and I had occasion to rent a small Chevy Cobalt in Minneapolis. I had never heard of the car before. The Avis representative told me the car would get fuel economy at about 30 miles to the gallon. We liked the car and were impressed that over roughly 4,000 miles of driving on freeways and in towns we actually got an average of 36 miles per gallon. Until watching a football game on TV yesterday, I cannot recall seeing any ads for the Cobalt on TV, or in several magazines and newspapers we subscribe to. Amazing to me! However, on the other hand, I've seen dozens of ads for the Cadillac Escalade, GM's full-size, luxury SUV at a much higher price and much lower mileage. I recognize that the profit margin is probably much higher on the Escalade, but doesn't it strike you that GM has apparently done relatively little to advertise the much more fuel efficient Cobalt for which there must be a much larger market?

GM, Ford and Chrysler management could learn a lot more from relatively successful auto companies like Toyota, Nissan, Honda, Subaru, and Volkswagon, some of whom, like Toyota, are operating profitable auto plants in the U. S. However, we should acknowledge that the foreign owned plants are generally benefiting from running newer more efficient facilities, lower cost non-union labor, and regional tax incentives in places like Tennessee and other southern states. They could also learn from successful non-industry companies like Southwest Airlines, and corporate investors and turnaround entrepreneurs like Warren Buffett and Carl Icahn, respectively.

It won't be long before we'll know the specific shape and structure of the bailout. Hopefully it won't unduly benefit current management and shareholders, there will ultimately be some reasonable returns to the taxpayers from the sale of the government's equity holdings and repayment of any loans, and the bailout will eventually prove successful in terms of a sustainable, profitable, very competitive, though probably smaller auto industry.