Thursday, November 20, 2008

Auto Industry - Bail Out Mania

While a Democrat-controlled Congress is trying to rationalize a new $25 billion bailout for the auto industry, at the Los Angeles auto show is a launch of a new electric car from Mercedes – the Mini ‘E’. In fact the gas version Mini has seen sales increase 30% year on year. There are clearly two auto industries in America: there’s American (Detroit) and foreign manufacturers. Could someone please rationalize why we are talking about bailing out Detroit for $25 B? For years, the American auto industry has struggled to keep up with foreign manufacturers like Toyota, Honda, Nissan, Mercedes, BMW and VW, all of whom are producing fuel efficient cars that the consumer wants to buy. These companies have managed their businesses well and are in touch with consumer wants and needs instead of foisting products on the market that consumers don’t really want. From what I remember in my Masters in Marketing, this is basic marketing theory. (We seem to have management at the helm of the Big Three who seem unaware of this.) So what went wrong? The Big Three have been in decline for years due to mismanagement, an inability to control unions and as a consequence, labor costs that are far higher than their competitors. The Big Three pay out an average of $30/hour more than their competitors, including pension and health care costs for hundreds of thousands of retirees, guaranteeing nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. Furthermore, they have shifted production of certain models to Mexico and Ottowa. Again, why are American taxpayers bailing them out? The Big Three Auto CEO’s quite frankly need to be fired, not bailed out. Yes we feel for the thousands of workers, but this is not the way to help them. What happens when the $25 B runs out? You guessed it. Layoffs! Why, because no one wants to buy their cars. There are many creative things we can do to stimulate job growth and assist people willing to re-train or re-locate. Indeed, just imagine how many start-up companies could be formed with a fund of $25 B. How about 10,000 companies funded by start-up loans of $2.5 M with restrictions and help with retraining and locating to depressed areas? Yeah some will fail, but what if it gives birth to a few more Googles? The Government would actually make money and create a lot of jobs with a trickle effect into the local economies. I'm not necessarily advocating this, but it is an interesting idea of what could be done. Taxpayers should not be footing the bill for what is clearly a temporary fix. In all my years as a consultant to start-up firms, no company gets funded without a sound and solid business model (post dot com bust). The Big Three have not presented a new sound and workable business model. They do not deserve a bail out and we need a Congress that actually has some experience in business rather than public policies and welfare programs. At least they should be consulting with business savvy people. A Bail out won’t work this time because it didn’t in the economic downturn in the 1980’s when the British struggling auto industry was also making cars the public did not want. Margaret Thatcher threw $11 B at British Leyland and couldn’t save it, nor the British car industry. What makes anyone think this time it’s different? We need to allow the Big Three to re-structure as many companies do under Chapter 11 Bankruptcy. And if we end up with the Big Two, so be it! It’s time for Washington to wake up. President elect Obama needs real business expertise around him, as it’s going to be a long tough ride over the next few years. Post your opinion or email me at


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