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  • July 2017
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Why GM can’t survive

Obama actually did it. He sent the automakers packing when they presented yet another “trust me, I know what I’m doing” proposal to justify wasting another big chunk of taxpayer payola.

What does this really mean, and why did the big O say no?

From what I’ve managed to gather, there were three main reasons for the “no”:

  1. The Bond holders weren’t taking a real hit
  2. The union demands were still unrealistic
  3. The automakers plans for becoming competitive were insufficient.

Lets look at them one at a time.

1. The Bond holders weren’t taking a real hit

People buy bonds because they are considered a fairly safe investment. However, they are only “fairly safe”, not risk-free. With the tanking of the auto industry, many of the bonds issued by them are going to be defaulted on. If the bonds are defaulted on, the people and organizations that bought those bonds will lose part of their investment.

Apparently, GM felt that asking their bondholders to take a significant hit was A Bad Thing, and wasn’t willing to stick it to them. Of course, in bankruptcy, bondholders pretty much always lose. That is because bonds are investments not loans. That means that the buyers are accepting the risk that the issuer of the bonds may default. Now, I don’t know about you, but from my vantage point, Even the most cursory glance at GM makes me think that any investment (stock, bond, whatever) in GM since the mid 70’s would be pretty high risk. As an entity, US automakers have been in a nosedive since the oil crisis of ’73, and personally, I would consider slot machine a better risk than US automakers.

Conclusion: if you own GM or US automakers bonds, its time to suck it up, and admit that it was simply a crappy investment.

2. The union demands were still unrealistic

Well, this isn’t really any surprise. The Unions have supposedly negotiated “as far as they can”. This means that US autoworkers are still ensured salaries that grossly exceed market value, that they have a level of job security that exists no where else in the world, and hta if their job goes away, they will still continue to get paid – working or not. The insane pensions plans that were negotiated over the past 20 years have not been adjusted, so uinion workers continue to collect benefits that  were based on a totally fictitious revenue model. Of course, they are also unsustainable, and they alone are capable of driving an otherwise healthy company into bankruptcy. When applied to an organization as poorly run as the US automakers, these pension plans become simply laughable.

While it is unfortunate that the union workers will probably be the ones to reap the results of the pie-in-the-sky labor practices at the automakers, the simple truth is that they’ve been grossly over paid, over benefited, and over over pensioned for a long time. Any losses that they suffer now will never begin to match the overcompensation that they have received for the past 40 years. Unfortunate, but just like Karma, it all balances out in the end.

3.The automakers plans for becoming competitive were insufficient

Lets get real folks. These are the companies that brought us the hummer, ands till think that it is a marketable and valid product. They have missed every major market shift since 1960, and have barely been able to follow the lead of foreign manufacturers (who, by the way continue to grab more and more of the market share). In other words, US automakers have been in a slow fade for more than 40 years. When they have faced catastrophic failure, the fed has stepped in to bail them out, but they have never recovered, and continue to slide.

In order to really recover, the automakers need to accept the fact that they are in need of a complete overhaul. From how they design and manufacture cars, to how they finance themselves, to how they negotiate with unions and labor. In other words, they need rebuilding from the ground up. In the business world, this raises a very interesting concept known as the “build or buy” decision. It’s a pretty simple concept: is more efficient to buy what you need from another vendor, or build it yourself.

In this case, the decision is easy: there isn’t another vendor that US automakers CAN buy a solution from (other than another huge infusion of cash from US taxpayers). That leaves the “build” option. Of course, if we are going to build US automakers from scratch, we have to address the question of “do we build from scratch, or do we try to rebuild whats already there”? this is the question that Obama is asking, and so far, the automakers haven’t come up with an answer that even begins to justify continuing to support the failed existing industry.

US automakers are too deeply embroiled in union politics, have too many years of bad management, and are simply too big to be able to react to the problems that they have created. By letting them fail, we will open the US market to new automakers. automakers that are not weighed down by years of poor management, bad contracts, and unrealistic agreements with unions and pensions. Yes, it will hurt. A lot. But only for a while. As new entities replace the dinosaurs, they will be able to produce cars that people want to buy, at prices that are competitive, and with workers that are fairly paid. Those new entities may be the successful foreign automakers, or they may be new US automakers, or (most likely) a combination of the two.

We faced the same crisis with steelworkers when US steel companies were in the same bind (unrealistic pensions, unrealistic unions, and better/faster/cheaper overseas competition). We went through some tough times, but recovered. The US auto industry is in the same state, and unless they are willing (and capable, which is doubtful) of to make drastic changes, they are destined to fail. the only question is: How much more taxpayer are we going to flush down the toilet before we accept that failure is unavoidable?