Sunday, May 31, 2009

Another Giant Falls

Chrysler has already fallen into bankruptcy. GM is next, as it's expecting to announce bankruptcy tomorrow. And thus, another giant falls. Ford is hurting, anyone want to bet it's going to be next?

It's troubling to me that to help speed GM through and out of bankruptcy, the US government is offering GM $50 billion in exchange for a 72.5% stake in the company. In essence, the US government will own almost 3/4 of GM. I can't speak for anyone else, but I personally find it a bit unnerving for the US government to have such a strong hold over the largest auto company in the US. Apparently, polls show that a majority of people find this potentially worrisome. I'm not well-versed in the issue and especially not in the politics of it all, so I can't comment if this "government take-over" is/will be a good thing or not.

So many people will be hurt by GM's bankruptcy. It's not just UAW union workers and manufacturers, but also auto parts suppliers such as Delphi. When a major auto company like GM tanks, it drags a ton of other people and companies down with it. Many people I know personally - especially parents - will be impacted by this. The Midwest will hurt. Badly.

These are scary and troubling times economically. For GM to lose $90 billion in the last several years, I have to wonder, how the hell did it get this bad?! It boggles my mind that we - someone - "allowed" it to come to this.


Jonathan said...

Ford will be fine - I am sure of it. They have done a lot of work to re manage and rework the company as a whole. They are the only one of the Big 3 who did not get a dime from the federal government and sales are still "alright" (relative).

No one allowed G.M. or any of the car companies to face problems - it was our fault in the first place that people could not manage their own money. It's a very controversial topic to who's fault is it, but the truth the economy is facing a recession.

In the past, American cars were basically shit. No one can deny that the cars from the Big 3 in the 1990s were HORRIBLE. Due to the competition gearing up, G.M. and Ford were ignorant and thought that the money lied in cheaper costs while making large percentages of product - this allowed the consumer to gain the out look we know today of "American cars suck." "Import's are better." The list goes on. However now, Ford and G.M. are doing the best they can and many of their vehicles do pass many standards set by the imports. For example, Ford has 7 vehicles that get more than 30 MPG - I believe Honda only has 5.

Like I said, Ford will be fine - their cars are groundbreaking compared to previous models - automotive magazines have given high pride to their cars and what is coming next may just in turn give them back the edge they had long ago.

G.M. is another topic. Due to it's size, with brands in Australia, Europe, China, and the United States, there is a lot more work that needs to be done. Even with super strong sales in China (number one in foreign sales), G.M. faces hardships in the United States where over 35% of their profit comes from. But with the United States economy slowing and no one out there buying new cars (which, like Ford and much better than people think), G.M. just had the worse hand.

Government help won't do anything - as proven before, throwing money at something doesn't help. If the government gets a hold of G.M., it will be a black hole of tax dollars and political perspectives. Allowing G.M. to go bankrupt will force the company to "kick out" the dirt in the company, relook their financials, and take actions that may save the company that would not be allowed to be taken if not (for example, getting a breath of fresh air from the unions).

It's going to be interesting - the next few decisions may make or break G.M.

(I am a capitalist, so I am biased).

Anonymous said...

You need not be worried about the US Govt owning 72% of GM.

1st: Let's face it -- the govt couldn't possibly do worse than than GM management.

2nd: This is short-term. The govt will sell off its ownership over time once it comes out of bankruptcy.

3rd: The US Govt is the only entity that could do this. If the Govt didn't, GM wouldn't go into and out of bankruptcy--it would simply dissolve out of existence, just every "mom and pop" restaurant that goes out of business.

If any other entity, or group of entities, were willing to buy GM (including it's debt), it would have happened. They weren't.

This is actually a good move that keeps as many jobs as possible and keeps GM afloat. That does not mean that there will not be pain. But that isn't the Govt's fault, that's GM's fault.

A perfect capitalist system would simply let GM disappear. It's a competition, and GM lost. But that, simply put, would be disastrous for the world economy.

Jonathan said...

Oh really? How many government programs do you see being complained about?

The government doesn't see far ahead enough. What are the affects of this decision? How will other foreign companies react to this? This is sparking interest by federal governments to aid big business - yet on the other side, so many want to get rid of.

Using your example, G.M. would have basically signed it's life in blood - having a company pay back for it's work rather than cutting costs, will only end up in years (we are talking decades) to buy back ownership.

When a company looses focus on profits to go to what's best for the "workers, the people," profit becomes that much harder to make.

G.M. needed to act long before this, and they didn't. Now they need to cut as much as they can (meaning jobs) and focus on profitable assets.

There are many companies that touch onto CH 11 bankruptcy and survived - I am sure with the product line that is coming out by G.M., it would have been in a better position to make such a grand decision.

Jonathan said...

Let me also say that it's not that I don't believe G.M. will survive through government help, I just believe that it may cost us even more in the long run. With ownership, comes responsibility, and once people realize keeping the workers with jobs, having minor-companies (materials, smaller companies within) still in business, may become a big fire burning up tax dollars. When it comes to government, they don't always see eye-to-eye with business and profits. The only way G.M. will survive - in government hands or not - depends on the money made, that's as forthright as I can get. If G.M. doesn't make major decisions to save the company, it may cost us even more.

If costs become to high, OUR tax dollars will be spent to keep it afloat.


Aek said...

Both of you have valid points.

I agree with aron2631 that it's GM's fault for mis-management when everyone's been basically telling them (and the Big 3 as a whole) that their decisions won't last them long-term. And now that warning has been fulfilled. To some degree, we consumers played a hand in this.

I agree with Jonathan's view of how the US government will likely handle GM (or not, rather). I've read that the US government will hold on to GM for a number of years and its shares won't be traded on the market.

So for several years, at least, GM will be subject largely to the US government's control.

We'll see how this all turns out. I'm obviously not versed in issues of politics, business, and economy, so all I can do is watch and not speculate.

Jonathan said...

That's all we can do right now - watch. Many of those who had part in this decision also have degrees from the best business schools. However, the thing about economics and business, is it's always changing and even some of the best have trouble keeping up.

For G.M. and Ford falling behind, or setting up the blame for their decisions in the past, well, it's not all their fault actually. Car sales in the 1990s were extremely well - and not just domestically either. What caught G.M. and Ford off guard, was the fact that Toyota, Honda, and a few others, started seeing that one fault the Big 3 had, was quality. This proved to be a big opportunity, and they started to improve quality. Then performance came around, as well as fuel economy. As they improved, G.M. and Ford still saw growth in sales, and continued the way they did.

So was it really their fault all together? No, of course not. They made a decision that reflected the times that they were in - they still saw profits, and the changes that the other companies made, didn't seem worth it. However, if they could go back in time now, they would have made the jump like everyone else.

cvn70 said...


Clearly not an easy subject to get a hold of but first the government has done this in the past when it bailed out chrsyler i think in the 90s

I peersonally dont like it when th egovernment involves itself in the market place but its such a large nd impoortant industry it cant help itself

I ma sure tey countthe votes beofre they act and its not just GM as you say. I hope the governemnt does not get into the car designing business and get out soon

take care and be safe


Doomed But Cheerful! said...

Paying unemployment benefit to a dissilusioned populace, and all the failing suppliers is horrendous. But I am still convinced government's role is not to own businesses. I guess this current strategy will keep people off street corners, and win votes, but it will fail to fix the long-term concern. In this case, how can the US expect to compete with China, Japan and India? There is already over-capacity in this particular manufacuring arm, and propping up some dinosaurs with tax-money will solve little.
Short term gain - long term fail.
G =]