Long, long ago, in a world nearly forgotten, Detroit and its three automakers were once the pride of America -- an exhibition of our raw industrial power. The companies believed they could do no wrong and were sure to dominate the industry as far into the future as their imagination could dream up. If only executives today could go back and warn their predecessors what their mind-set would cost them and our nation -- if only they could enlighten them.
Before the recession, Ford (NYSE:F) teetered on the verge of collapse and bankruptcy -- losing nearly $2,000 on every vehicle sold. It would have joined its crosstown rivals in bankruptcy if not for the vision of CEO Alan Mulally. By this point, Ford had long since forgotten that it was once an American icon that revolutionized the way our nation manufactured products.
As General Motors (NYSE:GM) finishes writing the end of its worst chapter in history, it's time to look back and see how much the bailout really cost us and see if we can begin to put the past behind us as investors, consumers, and above all -- Americans.
The bigger they are, the harder they fall
In the once-thriving Motor City, surging behind its automakers, the population reached 1.85 million in 1950, making it our nation's fifth largest. Following the gradual decline of its automakers, the city dwindled to just over 700,000 in 2011, according to the U.S. Census.
The moment that Detroit's population peaked marks the time when Japanese rivals Toyota and Honda entered the market with a radical idea -- high-quality, fuel-efficient vehicles. Detroit scoffed at the idea and was certain the American consumer wouldn't buy in. They were wrong. Dead wrong.
By the time they acknowledged years of strategic mistakes, it was too late for GM and Chrysler, which had to be saved through a government bailout, funded by us taxpayers. Here's how much it cost, and how much we lost.
By the numbers
When the government swooped in to save GM from a painful death, it tossed the company a $49.5 billion lifeline. As part of the agreement, GM was to restructure, return to profitability, and repay the funds by buying back shares purchased and held by the United States.
This ugly chapter in GM's history has dragged its brand image through the mud, and the shares held by the Treasury have in part kept a lid on its stock price. That will cause a massive loss when GM finishes buying its shares back from the government. Right now the U.S. taxpayer and the Treasury stand to lose roughly $11.4 billion on the transaction -- a staggering amount. To put that in perspective, let's compare what that number really equates to.
Envisioning $11.4 billion
- That much money in one dollar bills equals more than 12,500 tons.
- That much money is more than the GDP of Mongolia, more than 75% of Jamaica, and more than half of Afghanistan.
- That much money could pay all the Powerball winners in 2012 combined -- 10 times.
- That much money could buy every single share of Chipotle Mexican Grill -- tempting, right?
- That much money can pay 228,000 salaried jobs earning $50,000 each.
You get the idea: $11.4 billion is a good chunk of change. Consider that last statistic again. That's a large number of jobs this much money could fund, but consider that the money we lost in the bailout saved 1.4 million jobs through plant and supplier jobs. That's more than 15 times the number of GM jobs in the United States.
I'm not defending GM. It deserved to lie in the bed it made. However, the bailout did more than toss a lifeline to a drowning company -- It helped the nation as a whole during a dire time.
Investors, consumers, and Americans
As investors, we had plenty of reasons to avoid Ford and GM as investments. Both companies had every red flag that makes investors hesitate -- terrible management, poor-quality products, and zero sustainable profits or growth. Today, though, Ford and GM represent valid investments and are undervalued because most people don't realize that those three factors have completely reversed. People today are buying domestic vehicles because of value and quality, not because of the large cash incentives we saw in the past. Both companies are expanding into emerging markets for growth and are drastically improving their financial health.
As consumers, some will never get over the domestic vehicles they owned in the past, which turned out so disastrously. Detroit automakers lost some consumers permanently -- that's a fact. If you're a consumer willing to give Ford and GM a second chance, the vehicles now are significantly improved in all aspects -- especially Ford's. Consider that since 2010, Toyota and Honda are far ahead in vehicle recalls -- Toyota with triple that of GM's. On a different note, Ford's Fusion is catching up to Toyota's Camry in U.S. sales, which has long dominated the segment. The F-Series is again America's best-selling vehicle, and the Escape is one of the hottest SUVs on the market.
As Americans, we're watching as Detroit tries to rebuild itself as a city and an automotive powerhouse. Detroit's Big Three couldn't help themselves four years ago yet have now righted the ship -- through different routes -- and are now reinvesting in themselves and their city. It took me a while, but I finally agreed to put everything in the past and turned my Toyota Celica for an iconic American muscle Mustang -- a decision I don't regret.
Some of us will never give Detroit auto's a second chance, and that's understandable. I'm glad to be a longtime Ford shareholder and recently decided to give GM a part of my hard-earned money. I don't get emotionally attached to stocks, because you simply can't in this profession. That said, I'm proud to be part of a Detroit comeback. Let's hope it continues, and maybe one day we can put this ugly chapter in our rearview mirrors as investors, consumers, and, above all -- Americans.
Editor's note: This article has been updated to correct a mathematical error.