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  • Propping Up a Failing Auto Industry

    According to the latest news, the only obstacle remaining to complete a merger between General Motors and Chrysler is $10 billion in taxpayer money. Jui Chakrovorty Das and Kevin Krolicki detailed that GM and Cerberus Capital Management, the owner of Chrysler “have resolved the major issues in a proposed GM-Chrysler merger, but the final form of any deal would depend on the financing and government support available.”

    The full breakdown of the $10 billion but it has been reported that

    GM and Chrysler would have the Treasury invest $3 billion directly in the newly merged automaker in exchange for preferred shares with warrants, as with the banks. The government would take over $3 billion of the company’s pension obligation. To deal with the industry’s short-term liquidity problem, the government would also commit to buying $4 billion in commercial paper issued by the new company. All that for two companies whose market values today are each less than $4 billion. “

    There are so many problems with this; I’m not really sure where to begin. Let’s start with the Nissan is interested in acquiring Chrysler without help from the government. Last week, Carlos Ghosn, CEO of both Renault SA and Nissan Motor Co proposed “to acquire around 20 percent of Chrysler LLC and bring the Auburn Hills automaker into the French-Japanese automotive partnership, according to sources familiar with the situation.”

    The Detroit Free Press reports:

    While it’s been said a GM-Chrysler deal is Cerberus’ preferred option, the Free Press also has learned that talks between the private equity firm and Renault-Nissan continue. A deal also could be reached with Nissan alone.”

    Why should you and I, the taxpayer, fund the acquisition of Chrysler when Nissan is willing to do it without government handouts? Worried that Chrysler will become foreign-owned? How soon do we forget that Daimler is a German auto company that used to own all of Chrysler. By the way, Daimler, which still has a 19% stake in the company, says that Chrysler has “no value.”

    In all likelihood, the biggest concern is job loss. And, in all likelihood, jobs will be lost. But that’s not the whole story. Unfortunately, jobs will be lost with or without the merger – it appears we’re in a no-win situation. Steven Pearlstein asserts,

    “[E]ven with a government-financed merger, the companies are going to have to shrink by at least 25 percent to reflect the realities of a shrinking market and much-reduced market shares. That translates into the direct loss of an additional 40,000 jobs and the indirect loss of several hundred thousand more. There is simply no way to avoid this pain without making the company a permanent ward of the federal government.”

    Jobs are lost and created all the time. It doesn’t make sense for the government to subsidize a business in which no one buys the products. If that were the case, we’d be living in a world of cassette tapes instead of ipods and cell phones the size of bricks instead of the small, efficient phones we have today. Economist Walter Williams explains,

    When there’s progress, certain jobs are destroyed and certain jobs are created. The guy who used to deliver ice to my house no longer has that job. If we had tried to save his job, America would have been held back.”

    Having the government fund a dying parts of the auto industry will hold America back and it will lead to more handouts just to keep the companies treading slightly above water. We’re not going to run out of cars; in fact, if the government keeps handing out money to failing auto industries, we’ll have a bunch of cars sitting on lots that no one wants while auto industries that continue to innovate and adapt their business model will see their vehicles on the roads. BusinessWeek’s David Welch concludes that GM has been lousy at restructuring. Another $10 billion from the government surely won’t help. Pearlstein adds,

    The real flaw in the government-financed merger proposal is that it spares the companies from bankruptcy reorganization, the very process they need to get their costs and structure in line with market realities.”

    Posted in Economics [slideshow_deploy]

    5 Responses to Propping Up a Failing Auto Industry

    1. Spiritof76, New Hamp says:

      The big three automakers have dug their own graves by acquiescing to the bullying unions in the seventies and eighties. The GM management in particular is the least imaginative and highly bloated and continue in that fashion to this day.

      Stop the bailouts. Let the companies deal with the problems themselves. They have to shut down the plants in the US, get their costs down, grow the business overseas where they are profitable. Detroit is not entitled to have automotive jobs of the past. Everything in this country have become entitlement. The US government is pretty nearly bankrupt itself.

      With the card check system in place (Democratic Party platform, watch the foreign investments dry up in the automotive sector. Toyotas and Hondas will move elsewhere.

      Unions are destroying the local governments through their bullying Fire Fighters and Policeman unions. Every unionized town in this country will go bankrupt because they can not afford the pensions (actually more than the employee pay in most cases) and benefits. We have to decentralize unions.

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