Making Smarter Cars Instead of Stupid Decisions

Undoubtedly, the executives will travel business class when they come back this week; they will each have a business plan in hand, and Congress will give them $25 billion of taxpayer funds to gamble with. Equally without doubt, the money will be wasted, they will not learn from their mistakes, and they will be back again, and again, and again.

The Big Three have a track record of making really stupid decisions. Manufacturers have recklessly spent thousands of dollars per vehicle on advertising to convince drivers that they really want big gas-guzzling cars and trucks instead of the smaller fuel-efficient vehicles they really need. The car companies have foolishly peddled financing and leasing deals far beyond the financial means of their buyers, and they have vigorously opposed realistic fuel economy standards.

Overall, new car sales are down 32 percent this year and October was the worst sales month since World War II. Ford lost $3.3 billion and General Motors lost $4.2 billion in the third quarter, and they are quickly burning through their cash reserves. Chrysler has not reported its most recent losses, but its sales are down 31 percent and its estimated losses were $1.28 billion in the first half of 2008.

With sales grinding to a halt and their credit ratings plummeting, the Big Three cannot borrow sufficient funds in the credit markets to survive. Like drunks on a freeway, they are racing down the fast lane without a seat belt, holding a bottle in one hand and flipping off the public with the other, daring everyone else to stop them before they crash.

The auto companies have corporate partners, manufacturing facilities and distributors in all other developed nations. Their business dealings are so entangled with foreign economies that their failure would have worldwide repercussions.

Bankruptcy would likely force a liquidation of assets rather than a judicially-supervised reorganization and would, at best, result in the destruction of the automobile unions and employees’ retirement and healthcare benefit plans. However, every American worker and taxpayer would pay the price.

Elimination of the American automobile industry would send shock waves through the economy, causing the failure of thousands of automobile parts suppliers and car dealerships. Auto parts supply companies are among the top industrial employers in 19 states, and one out of every ten jobs in America is supported, in one way or another, by the automobile industry. It is estimated that the failure of General Motors alone could result in the loss of more than 15 million jobs.

Failure of the Big Three would only benefit foreign corporations who would swoop in to buy up the surplus manufacturing capacity, such as computerized robots, at bargain basement prices, and the balance of payments deficit would soar beyond calculation in the absence of domestic competition.

President-elect Obama opposes a "blank check" for the industry and says that "we should help the auto industry, but what we should expect is that ... any help that we provide is designed to assure a long-term, sustainable auto industry and not just kicking the can down the road."

The Democratic majority in Congress appears ready to provide a $25 billion Emergency Bridge Loan to the auto makers by either tapping into the Wall Street Bailout funds or by redirecting money already approved for retooling old factories to produce more fuel-efficient vehicles. Companies receiving loans would have to give an equity stake to the government and would be charged 5% interest for the first five years and 9% thereafter. Companies could not pay dividends to common stockholders and would have to agree to a $250,000 annual pay cap for executives.

If the Emergency Bridge Loan is the best Congress can come up, the can will just be "kicked down the road" – but not very far. General Motors burned $6.9 billion, Ford burned $7.7 billion, and Chrysler burned $3 billion in just the third quarter of 2008. Simple arithmetic tells us that $25 billion will not even get them as far as July 2009 before the Big Three CEOs will return with their extortionary threats against the economy and still without a clue.

The American automobile industry can be saved; however salvation requires America’s elected representatives, including its new president, to get off their knees and to begin to think outside of the box. The industry has to be forced to make smarter cars instead of stupid decisions for its own good and for the benefit of everyone.

As of the closing bell at the NYSE on Friday, November 28, the market capitalization (share price times number of outstanding shares) value of Ford was $6.43 billion; General Motors was only worth $3.2 billion and Chrysler was essentially worthless. In other words, the Big Three can be purchased entirely for less than half of what they are trying to borrow.

If the American people are going to invest $25 billion in the Big Three, shouldn’t they get something more than an "equity stake?" Why not take the whole shebang and save some money at the same time?

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