U.S. v Ford
June 6, 2009
The US auto industry is under attack, not from the Japanese or the Germans, but from our own leaders. I believe we may have witnessed the end of the American car industry. Ironically, the very ‘help’ that our government is providing is the primary reason for its extinction. First, our government (even with the best of intentions) can’t help but making bad business decisions. It doesn’t matter if they are Republicans or Democrats - politicians aren’t wired for business. For example both George Bush and Barak Obama decided to bailout GM and Chrysler. It was obvious that both of these companies were bankrupt and unless they were reorganized under the bankruptcy code they wouldn’t survive. Instead of allowing these companies to follow their natural course of reorganization our leaders pumped billions of dollars into them.
At it’s peak, GM was worth $56 billion dollars. Politicians have pumped more than $50 billion in GM so far and the estimates are we may have to pump $50 billion more next year. Our leaders managed to secure a 60% stake in the company in exchange for this $50 billion investment. This makes no sense. If you are buying assets in a bankruptcy you usually pay LESS, but when you let politicians run a bankruptcy this is what you get. Okay, maybe the politicians are paying a little too much, but we will make our money back, right? Not likely.
To break even the government will need to increase the value of GM to more than $83 billion (remember that is $27 billion more than GM has EVER been worth in history). Does this seem likely? Take into account that our demand for cars is shrinking considerably - back when GM was worth $56 billion we bought more than 16 million cars a year. Today (and for the foreseeable future) we only buy 10 million cars per year. Even the BEST CEO won’t be able to save GM - it is a mathematical impossibility, period. Without government help GM would have become a much smaller, leaner and nimble auto-maker. They wouldn’t have been saddled with billions in new debt. They could have a future - maybe even a bigger future. Take for example Amtrak, the railroad the government runs - since taking over the operation the business (if you can call it that) has lost more than $20 billion dollars since 1990 - it will NEVER make money because our leaders don’t have the ability to run it like a business.
GM is burning billions of dollars a month and our leaders aren’t as concerned about profits as they are about keeping their constituents happy. The Unions represent the largest voting block and contributors to the Democratic party. Our leaders will have to keep them happy regardless of whether or not it makes good business sense. Michigan voters want cars made in the US, not China so regardless of whether or not it makes good business sense to make parts in China GM won’t be able to do it anymore. Get it? If your primary motive is not profit it is VERY unlikely you will be able to generate a profit.
Okay, so what? The big ’so what’ is that Ford (and any other future US auto maker) is screwed. How can a ‘for-profit’ auto maker survive against a publicly funded rival? GM’s new boss can confescate money from the taxpayers (or simply print it) to keep the company running. Ford (and other non-publicly owned) don’t have this luxury. Even more troubling is that Congress might be tempted to ’tilt the field’ in favor of GM through legislation. I hope I am wrong, but I can’t imagine an outcome that allows Ford to survive…
