Should the government bail out GM? That’s a very tough question, because GM’s problems can probably not be solved within a time-frame that is short enough for the bailout to work. In other words: if 50 Billion dollars gives you 1 year to continue operations, are enough of the problems going to be solved after 1 year for the company to be viable and strong again? I believe that GM has three main problems, which I will outline below:
1. Overcapacity in the industry
The American auto industry has, over the years, built up an enormous production capacity. It is currently able to produce 17 Million cars per year in this country. However, the demand for American cars in this country is only about 10 Million per year. Naturally, the 7 million car excess production capacity is costing a lot of money, and is a big part of GM’s problem. The likelihood of demand for American cars nearly doubling so that supply can meet demand must be considered to be almost zero. A lot of customers cannot get car loans, and a renewed focus on public transportation is expected from the new administration in Washington, so if anything, driving in America is likely to go down in the foreseeable future. Nobody knows what’s going to happen to oil prices, but let’s just settle for the fact that they are volatile, and cannot be depended upon to be low. Even if GM were to make it through this crisis through divine or governmental intervention, a lot of people would still have to be laid off around the country.
2. Product line - GM does not build what customers want
It sounds like a cliché at this point, but the reliance on SUVs that GM has had, and still has, is deadly. The SUV will probably one day be almost as iconic to the current economic crisis as the sub prime mortgage. The SUV is a product that depends on the American people’s propensity to indulge themselves through credit when times are good. Consumers were able to buy bigger, more expensive cars, because gas was cheap and because their home values kept going up. GM makes many times more money per SUV sold, as compared to a normal car, so just like consumers got hooked on credit, GM got hooked on SUVs. The SUV market collapsed in 2008 because of high gas prices, and even though gas has become cheap again, the SUV is not likely to return in a big way.
It is more likely that the American consumer, once the dust of the financial crisis has settled, will buy normal cars with much better fuel efficiency. This is very bad news for GM, though, because the company cannot compete with Asian and European automakers in this market. These foreign automakers have spent decades perfecting their product lines of normal, fuel efficient cars as a result of high gas prices in the majority of their markets. In short, the extremely cheap gas in the United States (about 5 times cheaper than in the EU), has crippled the American auto industry for a very long time. If gas prices had been kept high by taxes, as is the case in the rest of the western world, I probably wouldn’t be writing this article right now. European car makers offer normal size vehicles that run on diesel that get 50 mpg, and small vehicles like the Volkswagen Polo that get 70 mpg (not for sale in the U.S.) and Japanese car makers offer hybrids that get 45 mpg. GM doesn’t have anything that comes close to this, and I won’t hold my breath for the Chevy Volt…
GM cannot simply turn around and all of a sudden churn out a whole new line of cars that will click with consumers. This transition would take years, as it has for all the others.
3. GM's quality is poor
Every 5 years or so since 1980, GM has come out and made public statements, saying that GM has finally caught up to, and surpassed its competitors in terms of quality. Lately, the company has increased the amount of times that it publicly insists on this fact. What is often used to “prove” this, is the dubious measure of “initial quality”. That metric only means that, for the first short period in a car’s life, there aren’t that many problems. But who expects a car to last for only one year? I can’t say that I know why GMs quality is so poor, but I’m guessing it has something to do with the corporate culture. It’s not like American autoworkers are unable to build good cars, they’re doing it in Toyota factories for crying out loud! Whatever the problem is, I know only this: it’s not going to be easy to fix. Just like with the product line, you cannot just snap your fingers and have quality. The problems would take years to fix.
In addition to these three problems, something has to be said about the auto unions. The unionization of workers in America has a unique pattern. Whereas most workers are not unionized at all, and efforts to unionize are usually illegally suppressed, the ones who, after all, are unionized make up a kind of “working class aristocracy”. This follows the pattern of “exclusive unions” common in other western countries in the 1800s. These types of unions were based on the medieval tradition of guilds, and would protect and insulate only those inside the unions. When labor movements became successful in Europe in the late 1800s, there was no longer any need for these exclusive unions, and “inclusive” unions were started instead. Inclusive unions would not be restricted to working for the needs of the members of the specific union, but would also have a focus on all working class people in general, and were instrumental in the creation of welfare societies. Some European countries have degrees of unionization in excess of 80% of the workforce, also including non-working class people.
The autoworkers at GM are part of this working class aristocracy, and hence their high cost is choking GM. Why should one working class person, such as an autoworker, make five times as much money as another working class person, such as a restaurant worker??? The autoworkers unions should start over, abdicate from the throne of the working class aristocracy, which is now only to their own detriment, and start working towards the creation of inclusive unions in America.
It would cost billions and billions for GM to go through Chapter 11 bankruptcy reorganization, and I don’t know who would bet so heavily on a losing horse, especially in a climate where nobody is lending any money for deals such as this one. In 2008, wealthy investors from America and abroad, have been convinced to invest in losing businesses, such as Citibank and Goldman Sachs, only to see their billion dollar investments evaporate a few weeks later. When investors are now not even investing in companies that, on paper, are doing extremely well, why would they invest in businesses that are, on paper, doing extremely poorly? For GM to even start going through a bankruptcy process, the company would need government assistance. Although I would very much like to see GM saved by a bailout, I don’t think that it can be done. I don’t even think that GM could be reorganized. Sadly, it seems that the only option that remains is bankruptcy liquidation.
GM wound up in this position because of misguided political policies on energy and financial regulation, and because of poor corporate governance on the part of GM. To make sure that this doesn’t happen again, here are a few more suggestions for the future:
- institute a gas tax in such a way that the price cannot go below $7 or $8 per gallon
- allow the growth of inclusive unions through new legislation so that there is no longer a need for exclusive unions that demand excessive salaries
- dramatically sharpen the regulation regarding fuel efficiency and quality of cars produced in the United States
- build an electrical infrastructure that is fit for a wide adoption of electrical cars
- allow low-sulfur diesel passenger vehicles to be driven in all 50 states