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One More Reason We Shouldn't Bail Out Detroit

By Morgan Housel - Updated Apr 5, 2017 at 8:06PM

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Make that 25 billion reasons.

Yesterday, Ford (NYSE:F) did something bailed banks like Citigroup (NYSE:C) and Bank of America (NYSE:BAC) were never required to do: It submitted a turnaround plan to Congress to justify its proposed bailout. The plan shows that Ford could return to profitability by 2011. Woo-hoo! Success is right around the corner!

Not one to take a struggling company for its word, I pulled up Ford's 2005 annual report to see how accurate its three-year turnaround projections have been in the past. No surprises here: Scroll down only a handful of pages, and you'll come across this telling 3-year-old prediction:

"This [turnaround] plan will restore our North American automotive operations to profitability by 2008."

Ah! So close! Maybe change just ain't its thing.

The truth is that Ford, General Motors (NYSE:GM) and Chrysler are on their last breaths because their business models have been outmoded for years, not simply because the financial crisis kicked 'em while they were down. I've yet to hear a good explanation why Toyota (NYSE:TM), Honda (NYSE:HMC) and Nissan (NASDAQ:NSANY) aren't on the brink of failure as well, if Detroit's problems are simply the result of a one-off economic storm.

But that isn't the half of what should concern you about providing the Feeble Three with the money they're requesting. Where they're proposing that money come from is even more worrisome.

$25 billion for me, none for you
Last year, Congress passed the Energy Independence and Security Act, which was primarily designed to raise fleetwide fuel-efficiency requirements. Tucked inside the bill was also the commitment to provide $25 billion for automakers and suppliers to produce "advanced technology vehicles or components."

Now that almost every corner of Washington has made it clear that the auto industry won't get their hands on one dime of the $700 billion in funds set aside to right the financial system, Detroit and Washington alike have put a bullseye on diverting money from that $25 billion development kitty, hoping to use it to get Detroit through its current survival scramble. The fear now is that the $25 billion appropriated to develop the next generation of cars could end up going to pay for Detroit's next generation of losses.  

On the other side of the country, Tesla Motors, an infant car company that designs and manufactures fully electric cars that can travel more than 200 miles on a single charge, has requested a chunk of the $25 billion fund. It wants to plow part of its request into a manufacturing plant in California that it'll use to build its next production model; a four-door, 100% gasoline-free sedan that serves as a beacon for our chance to wean ourselves from foreign oil dependence.

You want to talk about efficiency? Tesla designed and brought to production its first model -- a car that practically transformed the automobile as we know it -- for $140 million … start to finish. For comparison's sake, $140 million is exactly one-tenth of what Detroit collectively spends each year on its so-called "jobs bank," a program that literally pays idle employees to do absolutely nothing.

So in other words, the plan to get the automotive industry back on a sustainable track is to divert funds from innovative, efficient, and rapidly growing auto manufacturers. Instead, that money will pay for a Hail Mary chance that maybe, if we wish hard enough, Detroit will be able to pull off a turnaround it couldn’t accomplish when the economy was booming, much less in the midst of the worst recession in decades. You can't make this stuff up.

To put this all into context, imagine Ford and GM as they existed at the turn of the 20th century -- innovative and resourceful companies, poised to take the economy to new heights -- being stifled by a government hellbent on saving the horse-and-buggy industry.

There's a very real difference between bailing out something that has a sustainable and vital future, and bailing out something that's proven horribly inefficient. Now factor in bailing out something that's horribly inefficient at the direct cost of something that's innovative and spectacularly efficient, and we're venturing into a whole new realm of disaster.

Further functional Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Nissan is a Motley Fool Global Gains pick. Bank of America is a Motley Fool Income Investor recommendation. The Motley Fool is investors writing for investors.

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Stocks Mentioned

Ford Motor Company Stock Quote
Ford Motor Company
$15.41 (2.46%) $0.37
Honda Motor Co., Ltd. Stock Quote
Honda Motor Co., Ltd.
$26.74 (7.00%) $1.75
Citigroup Inc. Stock Quote
Citigroup Inc.
$53.99 (3.65%) $1.90
Bank of America Corporation Stock Quote
Bank of America Corporation
$35.38 (4.29%) $1.46
Toyota Motor Corporation Stock Quote
Toyota Motor Corporation
$157.63 (3.07%) $4.70
General Motors Company Stock Quote
General Motors Company
$38.05 (3.89%) $1.43

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