Friday, December 12, 2008

The Auto Industry Bail out, Politics and making the hard choice

In politics a lot of times politicians make the wrong choose because the right choice is the hard, this is the story of the auto bail bill. The easy decision for most politicians is to support the bail out bill and pretend that they are saving an American industry. At the moment there are 15 car companies that have manufacturing plants based in the United States, the big 3 and 12 international companies. While the international companies that have plants located in the United States employee fewer workers directly than the big 3, they produce more cars, their stock is owned by millions of Americans and they do a lot of research and design work in their American base locations. Like the big three they add a number of good paying high skilled jobs and add billions of dollars of value to the United States economy and unlike the Big 3 they are not asking for bail out.
These companies are doing better than the Big 3 because of better management, yes the Detroit has a number of legacy cost but many other business in other industries face similar cost but they either changed their benefit system or they died. Detroit has refused to change in part because of past assistance from the government and the belief that if they faced a major crisis the government would bail them out, and it seems that they are right. The big 3 have also made a number of bad decisions that have harmed them they allowed themselves to fall behind the international car companies in a number of different areas and they failed to adapt with changes in consumer needs and tastes in both the domestic and international market. Detroit has promised that they will change if they get the bail out but there is no reason to believe them so far they have resisted change and have refused to admit that they are not still competing in a market place that they could dominate like in the past. Will the government force them to make the changes that need to be made? The odds are probably not, any government forced restructuring of the Big 3 is likely to be influenced as much by politics as by economic needs. The changes that are made will probably be a poor mixture of economically need changes, political motivated changes that are not beneficial and could make the problem worse in the long run and many changes that are need will likely not be made because they are politically difficult. At best the bail out will just stave off the problems that the Big 3 are facing not fix them and sooner or later they will face another crisis.
What will happen if the Auto Industry in the United State collapse and will 2 million people lose there job like the Big 3 and the UAW claim? The mostly likely answer is no they wont, the international companies will certainly not fail and 2 million people will not lose their jobs. One or more of the companies will likely enter bankruptcy, Ford might have enough reserve to avoid bankruptcy, but GM is likely to enter bankruptcy. People need to keep in mind that corporate bankruptcy does not necessarily mean the company will cease to exist but that the company will under go court restructuring. This means that the company will have an opportunity to renegotiate the terms of the debts that they owe, labor contracts and restructure and streamline their operations. Many companies have emerge far stronger, more competitive and better able to face a changing market place after going through bankruptcy. Yes it will be unpleasant for the company, its shareholder, workers and debt holders but it has a better chance of producing an out come that will fix the long term problems faced by the Big 3.
Even if the one or more the Big 3 cease to exist does that mean the auto industry in the United States will collapse? No, not at all the American consumer and economy will still demand a similar number of cars a year, with or with out the Big 3, more cars that can be produced by the current number of plants owned by international car companies. Something will have to happen to increase the supply of cars to the United States market, imports could increase but imported cars are at disadvantage compares to similar cars produce in country hence the reason that many international producers have located in the United States. In the long run you will see international producers expand their productions with in the United States and new companies might well enter the market. In long run many of the plants, workers and production equipment of any Big 3 company that fails might well end up being employed again by a different producer.
In the long run for the American economy the best thing is for the government to make the hard choice and not bail out the Big 3 and let the market run it course. It might be hard at first but in the long run it will strength both the American Auto industry and the economy.

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