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GM Wants You to Fear its Collapse

This article was written by in Consumer. 74 comments.


Should American taxpayers bail out the automobile industry? Automakers headquartered in the U.S. have failed to make products consumers wanted to buy, whether due to a lack of quality, lack of targeting, or a lack of convincing marketing. Democrats in the Congress want to extend $25 billion of the $700 billion bailout bill to reach the “Big Three” automakers (General Motors, Chrysler, and Ford) while the current administration believes the $25 billion should come from a different program.

I receive several emails from public relation firms every day but generally ignore them unless they’re absolutely relevant. Today, I received an email from GM’s public relations firm to explain what would happen if GM were allowed to fail. The email also pointed to a website produced by GM to dispell myths about the company.

I have no doubt that allowing these three huge companies to fail could do more damage to our already suffering economy. If the government decides to extend $25 billion to the auto industry, I hope it is tied to results that show the companies are listening to consumers rather than the oil industry. The Big Three need to shed their reputation, deserved or not, of producing gas-guzzling, unreliable, and unsafe vehicles in comparison to some “foreign” automakers.

Do these companies deserve a $25 billion bailout?

Photo credit: brianc

Updated January 16, 2010 and originally published November 17, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 37 comments… read them below or add one }

avatar Mr. ToughMoneyLove

Flexo – At its core, this would be a UAW bailout, not a car maker bailout. The unions are scared to death of a bankruptcy because they would be forced into major contract concessions. So, they want taxpayers to step in and save their precious (and excessive) union contracts. Did the PR release from GM say anything about the huge disparity in labor costs between GM and Toyota? As in $26/hour difference?

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avatar Greg

The one question I want answered is “If we bail Detroit out, what will change so the companies will become profitable?”

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avatar Luke Landes ♦127,535 (Platinum)

Mr. T: The automakers agreed to the UAW contract, so they must have been willing to accept the consequences of paying a workforce more than Toyota (for example). That strategy might have worked when the Big Three were profitable. The public relations email (not a formal press release) focused on the American employees who would lose their jobs and the cost to all levels of government should GM fail.

UAW and GM seem to be in agreement in the need for a bailout of some form. Bush and the Democratics in Congress are also in agreement, with the dispute over the source of the funds.

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avatar Mr. ToughMoneyLove

Flexo – The auto companies agreed to all kinds of awful union demands, thinking that the profits made on trucks and SUV’s would pay for them. Now the truck/SUV party is over, so taxpayers are asked to step in. Of course GM and the UAW agree now because a bankruptcy would likely cause heads to roll at top GM management levels, with perhaps a Trustee calling the shots. They ought to resign now – it might cause some Republicans to change their mind on a bailout.

I voted for him but Bush has no idea what he is doing in matters of the economy and has completely abandoned any principles when it comes to spending taxpayer money. Now he is trying to salvage some sort of legacy by saying he saved the domestic auto business. I haven’t purchased a domestic auto in years so I won’t miss them a bit.

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avatar Colin

Part of me wants the US auto industry to implode, let the dust settle and start from scratch. The US has the potential and resources to be a very competitive automaker, but the quality of leadership has been sub par for decades and recovery would be slow.

The ONLY side effect that I am worried about is the tremendous loss of jobs and the further deterioration of US cities that have manufacturing facilities located in them.

However, I’m VERY tired of this wave of socialism that is sweeping the nation…

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avatar Andrew

Why is Rick Wagoner / CEO / GM still there? He has taken no responsibility for the meltdown. Let them go bankrupt. People will drive Japanese cars. Life goes on.

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avatar Green Panda

I hope that if a bailout is given then the automakers are require to make advancements in hybrids and improve on their gas mileage. Otherwise it’s not going to fix the long term problem. We personally buy foreign cars (VW and Acura) because of the quality (cars are past 100k and are doing fine) and gas mileage.

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avatar SingleGuyMoney

I’m so tired of all these bailouts. I wish these companies would have to take responsibility for their poor decisions. If you know or think the government will bail you out when you screw up, what incentive is there to do the right thing?

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avatar Mike

The auto makers should be left to reorganize under bankruptcy. It won’t result in any more losses than a bailout. When Chrysler got a bailout loan in the 80s they still laid off a bunch of employees. Layoffs are needed, look at the GM “Rubber Rooms,” or “Job Banks.” http://wsjclassroom.com/archive/06may/auto2_jobsbank.htm

A bailout that requires higher gas mileage could make things worse, and leave us bailing them out again. The CAFE standards require the automakers to make cars that consumers don’t want to buy. http://online.wsj.com/article/SB122100316976917063.html

Throwing money at the car makers isn’t going to solve anything. It will just buy some time, but it is buying it for very high price.

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avatar Dong

I am no fan of the American Auto Industry or Unions for that matter, but I think it’s rather naive to blame Unions or the CAFE standard for all that trouble the American carmaker. Unions would want to avoid bankruptcy as much as the companies themselves. At this point with GM shares trading at about $3 there’s not all that much for shareholders to lose. I think chapter 11 bankruptcy is the right solution for many companies. It was for airlines. However, car companies may be a different beast. Do you want to buy your next car from a bankrupt U.S. automaker? If I wasn’t already buying a Honda or Toyota, I don’t think I’d be buying from Ford under chapter 11 protection. The fact is that many of the Union deals were agreed to in times of plenty, and families have planned their life accordingly. Is it really all that fair to suddenly rip the pension and health benefits from a 70 year old retiree? How would any of you feel all of sudden if you insurance company said, “no, sorry times are tough, but we aren’t paying your bills any more.” even after paying a lifetime of premiums? The fact is mistakes were made, contracts were agreed upon that don’t make any sense now. The union and the automakers should’ve had more foresight, but they didn’t. The question is now what do you do now.

As for laying the auto problem at feet of CAFE, it’s just a pure copout from an ideologue on the board of the WSJ. As much as I like the paper, it’s editorials are hardly worth any salt. While you can argue on the effectiveness of CAFE, in the end it just the environment in which auto companies have to operate in the U.S. It’s no different than safety requirements. Successful companies operate smartly under any of set of rules.

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avatar Kate

Greg, #2, nailed it. Whether we throw $25 billion at each of the big three or not, these companies do not have even a short term plan for economic viability, let alone anything long term. They’re simply in a desperate panic. Would I rather see them fail before or after we’ve thrown $75 billions of taxpayer dollars at them? Um…gimme a sec…Before!

I say let the inevitable happen sooner rather than later, and at less expense. Yes, workers will lose their jobs. But what would $75B buy them? Another three months of employment? Not a good enough reason to put the taxpayer on the hook for this bailout, in my opinion. Let the big three fail and let one semi-viable business emerge from the wreckage. That leaves one manufacturer to scoop up military contracts and handle the transition to higher mileage/alternative energy vehicles.

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avatar UH2L

Since when does 20-25% market share imply that GM makes cars no one wants to buy? I’m sick of this negative spin that so many people partake in. It is damaging and affects thousands of people’s lives. Most car companies or companies in any industry would kill to have such market share in any industry. By restating that the companies have the reputation of making guzzlers that aren’t reliable or safe, you are perpetuating the mostly undeserved descriptors. Also, the Detroit Three make amongst the most efficient vehicles in higher volume segments like mid-sized cars and full-sized trucks. Their reliability is often as good as or better than their Japanese competitors. Read the following link to set the record straight. This is objective information…

http://www.freep.com/article/20081117/COL14/811170379

It’s really sad that we’re not at all patriotic when it comes to one of the last manufactured products developed and/or made in our country. I think we should reward companies that treat their employees well by buying their products. Instead we reward ones that overwork their employees sometimes to the point of them committing suicide. To wish for the Domestic Three’s downfall is sheer stupidity as the related job losses in other industries would be devastating. Millions of jobs in healthcare, advertising, legal services, construction, pharmaceuticals, banking, small businesses all will be affected. Your job may be affected even if you don’t live in Michigan! The financial industry should take some of the blame for what is happening too. Without easily available loans and leasing, the auto industry took a big hit. If anything, the auto industry should have been helped first. At least they were producing products honestly, not pushing numbers around and creating fake value in people’s investments.

If a car company goes bankrupt, all is not well. People will not buy a $25,000 piece of machinery from a bankrupt company because they will not have confidence in parts and service being available. So that is not a viable answer like it is for the airlines where people spend a few hundred dollars on a ticket whose value is used up in a short period of time.

Not to dismiss some of the management mistakes these companies have made, but the playing field hasn’t been level for a long time and the Bush/Republican administration did nothing about healthcare, currency manipulation, unfair trade practices. Strong economies are built off of manufacturing, not service industries. You can’t export services the same way for nearly as much money. A domestic auto industry owned by American corporations is important to our national security too. Toyota and VW plants in the US won’t be making tanks and defense parts if we ever enter into a major military conflict. You can’t just flip a switch and have a manufacturing base.

Sorry for the ramble, but people need to think and check their facts before dismissing this as just another bailout. It’s a loan and an investment which, if not made, will lead to higher expenditures in unemployment benefits, lost tax revenue, and more of a trade imbalance.

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avatar coopersmith

Might I tell you all that the suppliers for the US three also supply to ALL the other companies that have plants here in the US. All of these companies have razor thin margins and if the big one of the US three were to implode then the ripple effect to this economy would be devistating not just to the US three but to ALL CAR COMPANIES. Do I want the US 3 to fail no, do I want a bail out no. All I can say is that a loan to the US three would possibly elevate the prospects of putting three million people on the unemplyment line. And that is not just the 100,00 or so over paid union worker.

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avatar UH2L

coopersmith,

Thanks, I forgot to mention that too. That would just exacerbate our loss of manufacturing.

Also, if this article was truly objective, it would have shown more than just a picture of a Hummer. How about showing the Volt or a 33 mpg mid-sized Saturn AURA or 33mpg Chevy Malibu or an Aveo or VUE Hybrid for balance?

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avatar William

It seems the mistake many are making is equating this to an either / or situation. We have bankruptcy courts for a reason, and actually have a pretty good track record of companies coming out on the other end. The problem, of course, is that GM would collapse during a bankruptcy proceedings since it is so reliant upon credit with its parts manufacturers – it couldn’t continue to operate, forcing a total liquidation, which would certainly be devastating.

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avatar cordi

as the child of a UAW worker, I am sick of hearing people slamming the auto workforce. How lucky you must all be knowing your parents had a cushy deskjob all their lives, versus knowing that at any time your father could be crushed by the machine he’s crawling around inside to repair it, which is why he is paid “to excess”. Yes, such accidents still happen. But for a large number of people, the only opportunity they had 20, 30 years ago was to hope to god they could get a union job at a factory, because at 18 they were given a box of their belongings and told to move out. The majority of my father’s coworkers retired at 65 and drop dead within a year. And now he’s the only one of his trade left to do the work of about 5 people every day. Have some compassion.

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avatar gm fanboy

I love GM and have never owned anything but GM cars and trucks. With that being said I’ve got to also say that things need to change for GM. These union workers DO NOT need to make 30+ dollars an hour to shoot two screws into a tail light all day long. Not to mention all the benefits they receive. My brother-in-law works for GM and for years only worked 3 days a week and got paid for 4 becuase of some sort of shift incentive. I’ve delivered parts to Gm plants and had to wait to get unloaded because the person assigned to unload the dock I was pulled in to was at lunch. There was another fat, lazy forklift driver parked reading the paper. He just pointed to a line painted on the floor and said he didn’t have to unload anything on the other side of that line. When someone (his boss I assume) came over and asked him to unload my truck he basically told him to go get bent. These are the people who will be crying the loudest when GM goes under. I just don’t understand the reasoning of these people. It’s hard to justify a bailout when other companies manufacture and sell cars in this country and manage to make a healthy profit.

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avatar dogatemyfinances

I don’t get it, Cordi. GM’s plants are more dangerous than Toyota’s? Isn’t that the union’s problem too?

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avatar Emily

Oy vey, I am so sick of hearing about these bailouts! These companies got themselves into these messes…why are us taxpayers the ones cleaning up after them? These car companies should have done more to avoid this, just like Wall Street should have. The thought of the government rescuing so many companies makes me really nervous.

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avatar UH2L

Emily,

Read my post above and others’ posts as to why this is different. Many people will need unemployment bailouts all over the country and tax revenues for the government will be severely reduced as our trade imbalance grows and national security is put at risk.

UH2L

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avatar Jen W

I saw news clips of auto workers saying how they struggle to make ends meet and how worried they are if they get laid off. They get so much more in hourly pay and benefits than I do (no benefits); why didn’t they save some of that money? I am enraged that the taxes I worked so hard and paid for is going to bail out people who really should have significant savings. We can’t perpetuate the spend everything you have mentality; our country will just sink deeper.

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avatar UH2L

Jen W,

Wouldn’t you much rather bail out workers than bankers who pushed money around to make imaginary investments that crashed and led to reduction in our wealth? I don’t understand why people are so jealous of UAW workers. They don’t just screw on bolts. Many of them have skills such as model-making, equipment repair and maintenance, and running computer controlled machinery that not all of us could do. The monotony of repetition deserves some compensation as well. True, the union has its problems and not everybody is a model worker, but that happens in white collar jobs too. In fact, the unions are partially responsible for getting us to the level of wages and benefits that we enjoy today. Perhaps they’ve gotten too much over the last few decades, but without them, just think what working conditions would be like in so many industries.

UH2L

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avatar cordi

Toyota builds new factories when they come into the US. Many of the Big 3′s factories have been around for 50 years or more, and some still have tanks on the property, commemorating the contributions they made to WWII. The Ford River Rouge plant offers tours now.

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avatar cherryblossom

I would rather see the auto makers get a bailout than the banking industry.
The bankers push around funny money all day while the auto industry makes a tangible product that enhances the lives of everyone.
I do buy into the auto industries argument that the problems in the credit markets are at the root of their problems.
Is there mismanagement in the auto industry. Sure, but they are asking for much less for a problem that was cause by mismanagement in the financial sector.

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avatar ndjg

What!? The auto makers built cars that nobody wanted? Then how come they sold beaucoup SUV’s to the Soccer Mom’s (having the biggest tank protects my children) and everything was fine until the price of gas went up? After all, auto makers don’t sit in Ivory towers and just come up with car designs — they do Market Surveys to determine what will sell the most and make the most; and if they can save a few bucks on Government-mandated emission controls by calling a fancy truck an SUV, then fine. They were just abandoned by their panicked customers when gas prices rose; they were caught flat-footed (and inventory-free) by the sudden demand for small cars. Now everyone who is NOT in the auto business is an expert on what they should have built. It’s the same thing when a utility wants to spend $10 million to upgrade their transmission lines; those NOT in the utility business have the gall to say that the upgrade is unneeded, as if the $10 million expense is only proposed to satisy frivolous requirements.

The pundits should shut up about things they do not understand. If the auto makers need a cash infusion, let them borrow from the Government and pay interest.

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avatar Luke Landes ♦127,535 (Platinum)

ndjg: You are right. The Big Three *were* making cars people wanted… until people stopped wanting them as much. Then the manufacturers didn’t change to meet market desires as fast as other companies, or perhaps they didn’t anticipate the trend, and they had to play catch-up. They should have been the experts determining what to build. I’m pretty sure they had a good indication that the trend was changing, but their business models for whatever reasons didn’t accommodate making such a change as quickly as they needed to. Nevertheless, the companies’ inflexibility is probably not a reason for them *not* to receive government help.

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avatar shadox

I got the same e-mail from the PR firm and did my own digging. I am very much against this bail-out and resent the scare tactics that GM is taking to promote what is essentially corporate welfare for a hopeless malfunctioning company.

This is a link to my opinion on the subject: http://moneyandsuch.blogspot.com/2008/11/big-three-bail-out-good-or-bad.html

This is nothing like the financial industry bail-out. Here a company is essentially asking us to save it from the evil forces of the market, not to resolve a market failure.

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avatar UH2L

Flexo,

I was at GM in marketing from 1999 to 2005. I and others advocated that GM develop more car platforms instead of SUV and crossover platforms. But, GM is an American corporation that inherently chases short-term profits. Management that didn’t do so would have been ousted by the Board of Directors. The only difference is that the auto industry takes 5+ years to start a product from scratch, design it, engineer it, develop it, market it, sell it, etc… It takes expensive manufacturing, tooling and lots of unavoidable time to change product lines. It’s not like writing software. You can fault the BIg 3 for not having a more diverse portfolio, but if it weren’t for oil speculation causing a huge spike in oil prices and for the banks’ shady practices pulling the rug out from under the credit markets, the car companies would have been able to make it with their restructuring and negotiations. The government should have been raising fuel economy benefits slowly. Given the economic situation, they need a loan to get through. Our country needs the millions of jobs associated with the auto industry. To lose those would cause a major hit to the unemployment fund, would result in lots of lost tax revenue. In the end, not giving a loan will cost each of us much more. Nobody has the capital and is willing to take the risk to start a new car company. let alone buy an existing one like Cerberus and Chrysler. And as suppliers go under, even transplant car plants will not be able to build cars and they will have to lay workers offf. We will have a gaping economic hole around the country, will increase our trade imbalance, and we will lose a major part of our national security as it takes manufacturing to defend a country.

UH2L

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avatar jeff

Allow gm and whoever keep their agreement with their retired but make them go into bankruptcy and change their union contracts to reflect current conditions. Nobody gets or deserves a free ride.

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avatar MmmMaura

The American car giants have been in collusion with the oil companies for years, as in a “I’ll scratch your back if you’ll scratch mine.” Bigger gas eating monstrosities, need to guzzle more fuel. My feeling, since Exxon has recorded higher profits than god this last year, while the rest of the country, ie ordinary citizens have been had their futures pawned, all while we’re being flushed down the toilet, should do the bailing out. They’re got all our money, let them take care of the industry that provides them their profits.

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avatar GAURAV BHOLA

GM is to blame for its own demise. Those days are gone when GM’s fall would lead to the collapse of the economy, that is no longer the case. The bailout cash will be burned through for operating expenses and at the end GM won’t be saved. GM is using more than $2 billion a month to maintain operations.

STOP the government from giving away taxpayer money to many corporations.

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avatar Joe K., Homer Glen, IL

To all those people that are negative to the helping of our “own” Big Three Auto Industry, I bet your the same people who are driving the foreign competition. Maybe we need to limit the access of foreign products into our country and strive for a more competitive program of a fair exchange basis in the marketplace. The Big 3 are one of our “own” and employee thousands of people and we should be doing everything humanly possible to help them through this economic crisis which has stymied our country. The Big 3 did not start this economic downfall.

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avatar Greg

Joe K.,

Are you talking about the Big Three cars built overseas or my Honda built in the United States with American labor (the best in the world)?

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avatar harm

IMHO, “no!” to any private enterprise bailout. And yes, my job is dependent on the auto industry.

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avatar T

The thought of being against helping people retain their pensions is one I really agonize over. But, I think in this case, I can’t get away from it:

Overall, people lose pensions all the time. When the airlines went bankrupt and restructured, people lost their pensions. It happens with smaller businesses that are under the national radar all the time. We don’t swoop in as a country and start saving those companies.

If we want to help ensure that people who need help get it, the right way to do it is to ensure our social safety net is in place so that ALL people who lose a pension have access to services if they need them. Not to save some completely and leave others helpless.

In the meantime, if we continue to rescue companies that screw up badly enough, we create even more perverse incentives than already exist for taking on high risk for short term gain.

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avatar Rick

Regardless of the impact of bankruptcy, the Big 3 are not so big anymore, and should be allowed to enter bankruptcy. They have failed.

Each time a company faces failure, we are told that it will “impact the economy” and the government “loans” it money. Bankruptcy plays an important role in the economy – it allows for price discovery when none is available due to market closure.

Government bailouts create a false market – engaging in false price discovery – by borrowing money the government doesn’t have against future tax dollars. This is basically a loan, from our children, to us.
There is no reason to assume that government bailouts are good or useful. Few work. We all know about Chrysler, which was a success. But so many others have failed. Amtrak, while not technically a bailout, is a disaster, but the government decided railroads were too important to let fail. Yet Amtrak continually fails and we fund it with tax dollars.
The RTC was labeled a “success”, but the differentiation here is that price discovery was permitted through an auction facility which allowed the government to regain its “loans”.

Such an auction facility today for the various bailouts being considered, is unavailable or even wise to engage in.

Some companies MUST be allowed to fail, because failure sends a message – MORAL HAZARD WILL NOT BE PERMITTED OR REWARDED. Yet bailouts permit and reinforce moral hazard.

I don’t care how much the Big 3 “prove” they deserve the bailout, or what their plan for success is. It will fail. Remember one thing about the “success” of Chrysler – it succeeded because the government switched its fleet purchase agreements to Chrysler from its competitors. Had this single item NOT existed, Chrysler would have struggled. How will the government recreate this in the current muckup?

We have permitted far too much moral hazard. Some people must suffer for their foolishness. UAW workers may blame the corporations, but it is THEIR greed which also plays a role. I don’t mean to say $16mm a year payouts to CEOs of failing companies are justified while their workers only earn $56/hour or so…..but $56/hour is more than I earn, and I’m living comfortably in NYC.
I suggest all involved grow up and learn to deal in reality.

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avatar DasBook

I am no news savant, foreign policy expert, or even a very learned person, but I say let the automakers fall. All the machinists and skilled workers who put those cars together can be retrained to make something worthwhile instead of gas guzzling cars. Continuing down the same road of pumping out the same old cars is only perpetuating the problem. We need to get away from fossil fuel dependency, it’s gotten us in too much trouble already. Down with the white collar automakers. Raise a glass to bringing about a new era in American/global society, one without so many damned cars. How about putting the $25 Bill the automakers want into increasing the efficiency and attractiveness of public transportation in America?

I apologize if my statements seem naieve.

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