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I say we let the Big Three go belly up

Posted: December 4, 2008 10:03 p.m.
Updated: December 5, 2008 4:30 a.m.
 
"Lord Mr. Ford, I just wish that you could see
What your simple horseless carriage has become
Well, it seems your contribution to man
To say the least, got a little out of hand."

- Jerry Reed, 1973

When the silver-tongued Jerry Reed sang these words 35 years ago, little did he realize how prophetic they would be.

With the U.S. economy in a downward spiral and people not buying big cars, the Big Three automakers (General Motors, Ford and Chrysler) went to Capitol Hill again this week and pleaded for funding to keep them afloat.

Things have certainly gotten out of hand.

GM CEO Rick Wagoner claimed that GM stands to lose $2.5 billion in Q3 this year (following a $15.5 billion loss in Q2) and may be insolvent by early 2009. Ford and Chrysler are not in much better shape.

To show good faith and a willingness to "pitch in," Wagoner and Chrysler CEO Robert Nardelli said they would slash their pay to $1.

Of course, this was after flying to Washington in their corporate jets. Seems like a coach ticket would have been a much more prudent choice.

The automakers pleaded for $25 billion in loans to keep their companies running through these difficult times. Remarkably, the Democratically controlled Congress, usually the toadies for the big labor unions, told them to go away and come back later when they had a decent plan.

Why don't we simply let the Big Three go bankrupt? Many would argue that thousands of jobs would be lost at the automakers as well as upstream and downstream jobs at parts manufacturers and sales/distribution facilities.

What many folks seem to forget is that bankruptcy allows companies time to reorganize. And these companies desperately need that.

Many years ago, The Big Three entered into deals with the major labor unions that essentially paid workers an average of $73/hour (after benefits). Extremely generous pension programs were also attached making the U.S. autoworker the best-paid in the world.

The problem, of course, was that Toyota was paying their American workers $48/hour. On average, this labor cost disparity added roughly $2,000 to the cost of each Big Three auto.

This meant that to attain cost parity, for example, Ford had to cut out $2000 in features from the Taurus to make it equivalent to the Camry.

This helps to explain why I own a Camry today. I got more car for the same bucks.

Of course, when GM tried to develop an effective economy car, their cost structure prevented them from being able to turn a profit. The same was true of both Ford and Chrysler.

When gas prices hit $4.60 per gallon, no one was interested in buying a huge gas-guzzling SUV, truck or full-size car. Not surprising that business for the Big Three tanked.

But, there was Toyota with their Prius. They planned ahead, made the right business decisions and are now reaping the rewards.

The automakers would have us believe that if they shut their doors, chaos would ensue. Really? Does anyone honestly believe that all of the fixed assets used to make autos would simply go idle and never be used again? Hardly.

The Big Three could be broken up into the "Medium 12" or the "Little 30." There may be an interruption, but cars would once again flow from those plants.

Further, do we honestly believe in capitalism and survival of the fittest? If so, we should not reward incompetency, lack of foresight and horrible business practices with a huge lump of money.

Does anyone remember Studebaker, Packard, Cord, DuPont, Pierce Arrow, Hudson, Nash or AMC? All of these companies ultimately succumbed because they could no longer effectively compete in the marketplace.

American Motor Cars produced the wonderful Rebel, Gremlin and Pacer, cars so ugly that only the truly myopic would buy them. AMC was eventually gobbled up by Chrysler.

So, if GM goes the way of the DeLorean, who will be to blame? Clearly, the United Auto Workers will shoulder a large measure of the responsibility due to their greed and selfishness. But let us not forget the corporate management of the Big Three that failed to have the business acumen and foresight to see where the industry was headed.

Clearly, Japanese manufacturers like Toyota were ready.

Let's let the Big Three go belly-up. If they reorganize under Chapter 11 and get their business profitable again, then everyone benefits.

However, simply throwing money at poorly run companies is a bad idea. As another Jerry Reed song says, "She got the gold mine, I got the shaft." America would get the shaft in an automaker bailout.

Steve Lunetta is a Santa Clarita resident. His column reflects his own views and not necessarily those of The Signal. "Right About Now" runs Fridays in The Signal and rotates among local Republican writers.

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