U.S. Auto Bailout: Still a Ridiculously Bad Idea

Lynne Kiesling

There are still so many dimensions on which to oppose a taxpayer-funded bailout of the U.S. auto industry, the mind boggles … let’s start here: this Wall Street Journal article summarizes the current proposal from the “Big Three” U.S. auto manufacturers. This article provides a very useful set of facts about November vehicle sales relative to November 2007, for all auto manufacturers. Some results:

U.S. new-vehicle sales fell 37% in November to 746,789, according to Autodata Inc. It was the first time in decades that monthly sales fell below 800,000. The closely watched seasonally adjusted annualized sales rate was 10.18 million vehicles, a worse-than-expected drop from October’s 10.8 million.

GM’s sales fell 41%, Ford’s 30% and Chrysler’s 47%. Foreign auto makers were hit hard, too. Toyota Motor Corp.’s U.S. sales fell 34% and Honda Motor Co.’s 31%.

The decline in Toyota’s and Honda’s sales are extremely significant in this instance, because they have the largest market shares of the import companies and they have a substantial domestic manufacturing presence. If you would like to analyze the data for yourself, they are available at Autodata’s Motor Intelligence (Excel file). Looking at those data shows large declines for non-U.S. manufacturers as well; these data are presented from largest sales volumes to smallest sales volumes:

  • Nissan -42.2%
  • Volkswagen -21.5%
  • Hyundai -39.7%
  • BMW -26.7%
  • Kia -37.2%
  • Daimler AG -30.0%
  • Mazda -31.3%

There are more, but you get the point. Two things to note here:

First, the reduction in new vehicle sales is spread across the whole industry, and the only sense in which U.S. auto manufacturers are feeling a disproportionate share of the decline is the fact that (despite the rhetoric about their inability to design cars people want to buy) the three of them comprise about half of the market. Despite this fact, I still argue as I did back in November that the business models of the U.S. auto industry (and the UAW) are obsolete and unsustainable, and that the best thing that could happen for the long-term health of the U.S. auto industry would be expedited bankruptcy and generous unemployment, education, and relocation grants for employees.

Two, the root cause of this particularly dramatic and widespread decline is the changes in the underlying credit markets, with overextended borrowers and seriously constrained lenders. The only way that a U.S. auto bailout could contribute to alleviating this problem is because it would artificially maintain the solvency of auto workers who might not otherwise be able to buy a new car. That benefit strikes me as a drop in the bucket, and not worth an additional taxpayer liability of $34 billion.

Another dominant meme in the “Big Three” rhetoric is the “bankruptcy is not an option” language. At first GM’s Rick Wagoner offered it as an absolute, without providing any reason to substantiate his assertion. At least today the rhetoric is expanding to “bankruptcy is not an option because people will stop buying our cars, which will exacerbate the downturn.” I fail to see the logic in that claim. Bankruptcy does not mean that the assets of the organization will evaporate, but it does create an avenue through which those assets can be put to better use than they have been in their current situation. The nameplates may change, although if there’s any brand capital or any goodwill on the books in the GM, Ford, and Chrysler names, they will survive. If existing customers have warranties that have not expired, whoever buys the firm’s assets will have a responsibility to honor those warranties. If there is value in the supplier/OEM contracts, they will survive.

The arguments of the “Big Three” U.S. manufacturers have failed to persuade me that using the future resources of future taxpayers to perpetuate their obsolete and unsustainable business models is a reasonable way to spend those resources. The data continue to suggest that Shika Dalmia’s article at Reason yesterday got it right:

“There is no point in using taxpayer money to postpone the inevitable.”


8 thoughts on “U.S. Auto Bailout: Still a Ridiculously Bad Idea

  1. > whoever buys the firm’s assets will have a responsibility to honor those warranties

    False. Executory contracts may be assumed or rejected at the time of the bankruptcy, and, if rejected, become a liability that is parri passu with unsecured creditors’. In principle, a warranty holder could make a claim with the bankruptcy court that would be given a dollar amount and paid pro-rata with bondholders etc.

    In contrast, any warranty offered after a bankruptcy filing would be an obligation of the ongoing company, and would be senior to any claim before the filing. It might make sense not to buy a car from an automaker that is likely to go bankrupt in the near future; we do not see that in the above data, where Toyota has seen a drop comparable to that of the big 3. It makes much less sense not to buy a car from a company that has already filed; there may be problems finding replacement parts or the like if a line is to be closed down, but the problems are significantly reduced from those immediately preceding the filing.

  2. There is nothing inherent in an asset sale that binds the buyer to honor any prior legal claims, including warranties. In fact there’s plenty of precedent for warranty holders to get hosed. That’s exactly what happened when GE bought Enron Wind, and I believe the same was true of the Astropower asset purchase.

    Besides, if Toyota and Honda can manufacture profitably in the US, then so can American companies under new management and new labor terms.

  3. There is nothing inherent in an asset sale that binds the buyer to honor any prior legal claims, including warranties. In fact there’s plenty of precedent for warranty holders to get hosed. That’s exactly what happened when GE bought Enron Wind, and I believe the same was true of the Astropower asset purchase.

    Besides, if Toyota and Honda can manufacture profitably in the US, then so can American companies under new management and new labor terms.

  4. I agree that automotive companies should not be bailed out, and I also agree that bankruptcy should be on the table. I disagree, however, with your assertion that bankruptcy would not exacerbate the purchasing problem.

    If a car company goes bankrupt, the manufacturer’s warranty would be worthless. Although I’m sure any workout would include consumer protection, consumers may not know or trust any protection. If you had the choice between two vehicles, both with 50,000 mile warranties, would you be more likely to buy the one with the financial resources to stand by the warranty or the one in bankruptcy.

    (The counter argument, of course, is that the automakers have already crossed the Rubicon by begging for money to stay afloat.)

  5. If these companies go into bankruptcy you can kiss goodbye to these brands. Who would want them and why? ‘Expedited bankruptcy’ is out of the question. With bankruptcy, the entire dealer network will evaporate (their credit is maxed out) – that’s an asset gone. Suppliers are going to get slaughtered if production stops and they don’t get paid. The entire dealer network would have to be rebuilt and the suppliers would be demanding life support (currently they are demanding cash on the nail – no 30 day nonsense). Dealing with all that is a nightmare anytime. What lunatic would want anything to do with it in a recession? Even if some masochist steps up to the plate, where are they going to get the money to rejig the companies? Borrow it? ROFLMAO. Bankruptcy is only an option if you believe in fairy-story endings. And how much are your ‘generous unemployment, education, and relocation grants for employees’ going to cost? You begrudge this industry $34bn because of its business plan. So, does Citigroup have a better business plan that it deserves, undebated by congress, a $300bn handout? No debate, no questions, ‘Hey Vikram, have $300bn, Signed, your pal Hank’. Bloomberg reports that Wall Street has set aside $20bn in bonuses, I’m sorry, ‘retention payments’. No, stick to your fairy tale textbooks and spreadsheets and let the adults alone to run things.

  6. One of the main aruguments for the bailout is that the money will stop job losses at manufacturers and suppliers. But this makes no sense because the problem is on the demand side, not the supply side. The annual market for new vehicles has declined to 10 million units, yet the domestic industry capacity is based on demand of 16 million+ units. The bottom line is the entire industry (manufacturers, suppliers, dealers, etc.) has significant overcapacity.

    Considering the forces at work in the economy right now–high and rising unemployment, declining home equity, declining values of investement portfolios, the demand picture is not likely to change any time soon. Certainly not in the next three to six months.

    Bottom line: the bailout is a waist of money, as it will not solve the problem. Solving the problem will require job cuts. And Detriot’s problems did not spring up overnight. The Big Three have been loosing market share for many years at the hands of both imports and transplants.

    Let the market work. It will find the most efficient way to allocate capital. Any action by the government is, by definition an inefficient use of resources, and is not sustainable.

  7. One of the main aruguments for the bailout is that the money will stop job losses at manufacturers and suppliers. But this makes no sense because the problem is on the demand side, not the supply side. The annual market for new vehicles has declined to 10 million units, yet the domestic industry capacity is based on demand of 16 million+ units. The bottom line is the entire industry (manufacturers, suppliers, dealers, etc.) has significant overcapacity.

    Considering the forces at work in the economy right now–high and rising unemployment, declining home equity, declining values of investement portfolios, the demand picture is not likely to change any time soon. Certainly not in the next three to six months.

    Bottom line: the bailout is a waist of money, as it will not solve the problem. Solving the problem will require job cuts. And Detriot’s problems did not spring up overnight. The Big Three have been loosing market share for many years at the hands of both imports and transplants.

    Let the market work. It will find the most efficient way to allocate capital. Any action by the government is, by definition an inefficient use of resources, and is not sustainable.

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