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MONEY MATTERS | Financial responsibility and discipline is not always pleasant – it’s always easier to be a spendthrift than be frugal (in terms of a company this can be seen as good management vs. poor management). However, when fortunes change or the economy faces a downturn as we’re currently facing, one will likely be left out cold if prudence isn’t exercised. Now, despite poor management, the Big Three auto makers (GM, Ford, and Chrysler) are requesting Congress for a $25 billion rescue package loan to get them out of their current problems (this would be akin to asking friends or family to help out financially if one were in trouble). While this may be good for GM, this is certainly not good for America.
General Motors is currently bleeding around $2 billion a month. Based on their recent quarterly results, the company stated that it may not have the adequate capital to run its day-to-day operations within the next few months if this trends persists. This injection of capital is needed “to address the devastating automotive industry recession caused by our nations’ financial meltdown, and the current lack of consumer credit, which has resulted in the critical lack of liquidity within our industry” as stated by Chrysler’s CEO, Robert Nardelli. While this may help alleviate their current problems, it is in the words of senator Chris Dodd, “treatment for wounds that are to a large extent self-inflicted,” and would not change dismal management nor an uncompromising labor union such as the United Auto Workers (UAW).
If GM and the others do not receive the $25 billion in aid, we’ve been warned that up to 3 million individuals could lose their jobs and could wreak further havoc to an already suffering economy.
However, bankruptcy would be the least bad option. How so? By undergoing a Chapter 11 bankruptcy, a company is allowed to restructure and reposition itself while giving it time to stave off its creditors. If the company is a viable enterprise, it typically emerges stronger than before it went into bankruptcy. The current management of all three auto makers has shown an inability to restructure and reposition their companies as they are. They have been unwilling to accept that their problems are largely of their own doing (GM’s CEO, Rick Wagoner, has held the position for approximately 8 years, which should have been enough time to steer such a large ship) and are more concerned with their plush compensation packages (Mr. Wagoner, for example, earned a base salary of around US$2 million in each of 2006 and 2007, but total compensation amounted to more than US$25 million each year if stock compensation is included. If GM goes bankrupt, his stock, along with all other shareholders would be worthless, and he would likely be out of a job), rather than a stoic interest in America or their employees. Management at all three companies has ardently refused (they’ve gone as far as lobby Congress) to develop more fuel efficient engines and have taken a short-term focus by pushing sport-utility vehicles – the segment in the auto market where American manufacturers were most profitable. The tide has now turned against them and consumers no longer want the same gas-guzzling sport utility vehicles given high gas prices. By taking such a short-term view, management failed to act in the interest of its shareholders.
Therefore management, at least at GM, needs to be replaced.
Even so, the majority of the fault does not lie with management, but with the UAW, which has been uncompromising in reducing its benefits (UAW workers are paid more than double that of comparable employees at Japanese car manufacturers in the US before benefits and around 4-5 times more if benefits are included). They are in essence requesting the American taxpaying public to aid them with their healthcare and pensions in a country that does not provide universal healthcare. By undergoing bankruptcy, the (hopefully newly appointed) management of the Big Three would have more leverage to renegotiate contracts and be more competitive against Japanese auto transplants in the US – this does not imply that the workforce would be reduced nor kept as is. Therefore chapter 11 bankruptcy would be best for all.
With that said, the Big Three will likely need some form of funding from the government, as highlighted in Andrew Ross Sorkin’s article in the 'New York Times'. The auto industry is important to the US economy so long as it is a strong one that can be self-sufficient. If the US Government gets involved let it be the most effective and least costly way possible, and allow it to profit from its investment. By providing aid prior to declaring bankruptcy would merely leave them off of the hook and reward their poor behavior. If not done carefully, any or all three may go the way of the British Leyland, a now defunct auto maker.
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