Automakers in Danger of Getting What They Want

Be careful what you wish for, is an oft-heard admonition, because you just might get it. That's the dilemma facing U.S. automakers as they continue to press for the government to bail them out.

It looks like Congress is gearing up to let them have access to the bailout funds that were originally to be used for propping up financial companies. While General Motors (NYSE: GM  ) and Ford (NYSE: F  ) might consider that a victory of sorts, their case may have been too persuasive, in that the carmakers may not like the strings that come attached to the money.

For example, the bill being considered by Congress is said to include a government oversight board that would have a say in the future direction the carmakers take and more stringent control of executive pay. Would GM still be allowed to buy Chrysler after the storm passes? It would have to get that past the political appointees sitting on the board. Ford wants to jump-start its pickup truck plants, thanks to now-lower gas prices; would the board members agree with the decision?

Of course, automotive parts manufacturers see this as a chance to feed at the trough as well. Lear (NYSE: LEA  ) , for example, recently posted huge losses, as did Visteon. With more than 600,000 employed by auto parts makers, according to one report, the industry's position is that the ripple effect of withholding aid to the automakers is hurting them, too. In fact, they argue they should have access to the funds as well.

The labor unions that have been agitating for greater aid above and beyond the $25 billion already approved for the carmakers to retool for more fuel-efficient cars might want to take heed as well. With pay and benefit packages typically more lucrative than those enjoyed by Toyota (NYSE: TM  ) or Honda (NYSE: HMC  ) , concessions will probably be necessary.

The industry players are circling now and the politicians are throwing chum in the water to create a feeding frenzy. But the ones who will be eaten are the taxpayers. Giving GM, Ford, and Chrysler more money doesn't ensure they will survive since the structural defects of the industry remain in place: too many brands, too many expensive labor contracts, and too little recognition of consumer and industry trends. Further, an oversight board does nothing to ensure that the right decisions get made -- the history of Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) makes that clear. Instead, it risks becoming a dysfunctional relationship where bowing to political pressure is the norm and protection from real reform is encouraged.

Although GM says bankruptcy is not an option, it's becoming clear to this Fool that protection through the courts is the best option. Only in bankruptcy will the carmakers be able to shed their expensive legacy costs and truly retool their operations for greater efficiency, both in the cars they make and the businesses they run.

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Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (14)

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  • Report this Comment On November 17, 2008, at 4:07 PM, websmith1 wrote:

    What Congress, the Senate, and the President are arguing about is whether or not 10 million more Americans will lose their jobs and whether or not this country will maintain any manufacturing capability at all. If we lose 10 million jobs the loss of commerce will cost us 10 million more jobs and affect foreign companies and the ability of people to eat in 3rd world countries.

    The unemployment costs to the taxpayers, should they fail to provide our automakers loans, will exceed $200 billion per year. Aside from all of the other issues that these armchair automakers are trying to cloud the issue with, it definitely is a no-brainer so, even these people should not be having this much trouble making a decision.

    http://ewebsmith.com/gov/autobailout.html

  • Report this Comment On November 18, 2008, at 10:07 AM, andys2i wrote:

    The automakers bailout is a complex issue and a lot of the stats (like the 1 in 10 employee impact) are plain misleading depending on which side of the argument you stand. In a recent review of th pros and cons of the bailout ( http://www.savingtoinvest.com/2008/11/us-automakers-bailout-... ) my view is that the bailout of the Big three US automakers will happen and the proposed $25 billion package will be approved by year end. Despite critics on both sides, the US automakers bailout proposal has strong bipartisan support and the President-Elect has publicly stated his backing of a constructive bailout plan. It is just too important (perceived and actual) to the nation’s economic recovery. The key will be how the bailout package is structured for short term and long term reform. For it to be successful the US automakers will have to undergo a radical make-over in terms of labor rates and union structures, past and current worker benefits and accelerating the move to cleaner energy vehicles. Further their executives, need to be replaced by new talent whose focus will be on making the companies as efficient as possible to compete in the 21st century and to eventually repay (with interest) the taxpayer funded bailout.

  • Report this Comment On November 18, 2008, at 10:27 AM, ddro wrote:

    I believe if we look back 30 years we will see that the Chrysler LOANS were paid back early and helped Chrysler remain alive for 30 more years providing good paying jobs for its employees and suppliers and their families. What the auto industry needs is help just like any other big bank or insurance company such as AIG and Citibank. If anything GM, Ford and Chrysler deserve these loans more that the others because they are one of the United States few remaining Manufacturers that are critical to our national defense. Gm and the other auto manufacturere retooled during Americas past wars and supplied America with military machinery and weapons quickly which we may need in the future. Along with the nearly 400,000 employees and 2 million support industry jobs relying on the american auto industry are the retirees and their families. If we allow the american auto manufacturers to fail we are telling every american out here that never believe ANYTHING you are told by your company or your government about ANYTHING ever again. Don't believe that your portfolio will make you a millionare if you give up and sacrifice now. Don't believe any investment company that wants you to invest in their promises now for a better future. We as americans owe it to ourselves to make sure that the basic american principal is hard work now for a better tomorrow, with the reward being there instead of empty promises. Remember, Nissan was in worse shape than the American auto companies before they merged with Renault and became profitable again. We can do it and we certainly should. The Motley Fool is in my opinion foolish to endorse letting the Auto companies fail. The pain is too much for too many and would encourage a generation to remain thinking only of themselves only for today. That is what caused most of these economic problems that we see today.

  • Report this Comment On November 18, 2008, at 2:49 PM, Beejdaddy wrote:

    ddro -

    Would Chrylser have been able to repay the loans (early or otherwise) if they hadn't been fortunate enough to create and ride the crest of the highly profitable minivan era? I don't see anything like that on the horizon for the Big 3. The Volt and it's ilk will be very expensive to produce for some time before they will generate SUV/minivan-like profits.

    I agree we need to maintain a strong manufacturing base, but I have a feeling the next world war won't require a WW2-style retooling of the Big 3. Rosie the Riveter will get nuked along with thousands/millions of her neighbors before she can start mass-producing UAV drones and T-1000 cyborgs.

  • Report this Comment On November 18, 2008, at 3:38 PM, TMFCop wrote:

    andys2i,

    I agree a radical restructuring is necessary with the Big Three, but I don't think that will come as a result of a government bailout. Really, and at the risk of sounding partisan (but it's not, because I don't think the Republicans have the will to do it either), is a Democratic administration and Congress going to challenge the labor union structure? I think not.

    And while a house cleaning is needed in the upper management levels, I also doubt government-approved appointees will have the political will to make the changes necessary.

    That's why a bankruptcy filing may be in the industry's best interest. It doesn't mean they would stop making cars and disappear. Instead they would use the protection of the bankruptcy courts to initiate a fundamental change in how they operate. They would be allowed to shed their higher cost structures. They could rid themselves of their expensive dealer contracts. They could emerge a much leaner, more competitive company.

    Giving them money now will only serve to keep propped up an inefficient, money-losing operation that will have neither the will nor the wherewithal to make the changes necessary.

    Rich

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