From Private Jets to Hybrid Cars – is this enough to secure a bailout for US automakers?
High costs and weak sales are threatening the survival of the three major US automakers. General Motors, Chrysler and Ford have made it clear that they cannot survive without assistance from government. And with the recent $700 billion bailout of financial institutions it might seem like a reasonable thing to do. The CEOs of the three corporations have asked Capitol Hill for billions of dollars in loans to prevent them from filing for bankruptcy. But many voices of protest have gone up, and The Economist has stated categorically that a bailout will be a mistake. After an initial request for $25 billion, the US Congress sent all three corporations back to do some homework, and revised plans were submitted on December 2nd.
There were many things to consider with the development of such new plans, not least of all the need to get rid of the arrogance and big spender mentality that probably contributed to the difficult position these corporations are in at the moment. A few weeks ago, all three CEOs travelled to Washington in private jets (estimated cost: $20000 per round trip per CEO) to request tax payers’ money to bail them out. This time the CEO’s of both Ford and General Motors travelled to Washington in their respective companies’ hybrid cars to submit their revised plans. This is a far cry from Bob Lutz, vice chairman of General Motors, who shared a few pearls of wisdom with journalists during a lunch earlier this year. According to him, hybrid cars like those manufactured by Toyota does not make economic sense, global warming is a “crock of s**t” and finally his view then was that the best car dealers will thrive even in a sluggish economy. “They’ve got to isolate themselves from the economic forecasts,” Lutz said, “and say, ‘I make my own prosperity.’ ”*1 The message that is now coming from the big three corporations is that they need the bailout to help them to innovate and thrive in future. This has not convinced three times winner of the prestigious Pulitzer Prize, Thomas Friedman, who wrote in the New York Times: “We have to subsidise Detroit so that it will innovate? What business were you people in other than innovation? If we give you another $25 billion, will you also do accounting?”*2
What caused the problems in the industry? Friedman blames an un-innovative business culture, visionless management and overly generous labour contracts. But perhaps the real issue at stake here is the unethical, greedy and unsustainable business practices that still characterise large parts of many multinational corporations. That rings a bell, doesn’t it? When we think back to the collapse of Enron and its aftermath we are reminded that more regulation is not the solution. Many people argue that the Sarbanes-Oxley Act distracted companies from getting back to basic, sound business practices in a post-Enron world. This problem is demonstrated clearly by the following “frequently asked question” from the SEC web site: “An issuer is filing a Form 10-K report after August 29, 2002, the date Rules 13a-14, 13a-15, 15d-14 and 15d-15 became effective, for a period ending prior to the effective date. Section V of Release No. 33-8124 provides that the certification required to be included with the report need contain only the statements set forth in paragraphs (b)(1), (2) and (3) of Exchange Act Rules 13a-14 and 15d-14. However, the instructions to Forms 10-Q, 10-QSB, 10-K, 10-KSB, 20-F and 40-F indicate that the required certification must be in the exact form set forth in the report. Must a certification filed during the transition period for a period ended before August 29th include the statements set forth in paragraphs (b)(4), (5) and (6) of Rules 13a-14 and 15d-14?”*3
So, if regulation is not the solution, what about a bailout? A bailout also cannot provide a long term solution. In 1979 Chrysler was given a $1.2 billion loan by the US Congress when they were struggling to survive in the midst of the oil crisis. The fact that the company repaid these loans and survived until today is used by some to argue in favour of another bailout. But others disagree – in an upcoming book entitled “Bailout Nation”, Barry Ritholtz, owner of a New York based equity research firm argues that the bailout actually helped cause the decline of the auto industry. A refusal to bail out Chrysler in the 1970’s would have caused introspection at all the major automakers, he argues, and helped them to focus on smaller, fuel-efficient cars and manufacturing quality.
Of course, the other problem with a bailout strategy is not unlike the problems associated with paying ransom (or paying bribes, for that matter). If you assist the automakers themselves, why not their first-tier suppliers, who are most certainly also suffering at the moment. And what about the retail industry that will have to survive until consumers can afford to spend again? A special case can still be made out for financial institutions, because they are so integrated with the entire socio-economic system and the good institutions were just as threatened as the bad ones when people started to lose faith in the system. But if an automaker or a retailer fails as a business, there will always be investors waiting in the wings who will see an opportunity.
The choice is not an easy one. According to Prof. Ollie Williams, business ethics professor at Notre Dame University, the ripple effect of the current crisis on millions of Americans is something that the country cannot afford at the moment: “There is no question that the industry itself has been poorly managed, and we can expect major changes in management in the short term. In many ways this is a “teachable moment”, a wake-up call for US business. We must change our ways! But we must also do the bail-out”.
Although the details of the revised plans are still a bit sketchy and will only be debated in the US congress later this week, the basic plans seem to be in order – the CEOs have agreed to reduce their salaries to $1 a year, workers will accept lower wages as well, there will be redundancies and reductions in brands, and a very strong emphasis on innovation and fuel efficiency. Nancy Pelosi, Speaker of the United States House of Representatives, has made it clear that bankruptcy is not an option because it will take too long and everybody will be disadvantaged by such a process. At a news conference on December 2nd, she indicated her support for some form of a rescue package as long as the emphasis is on long term viability of the industry, accountability to tax payers and innovation.
From a South African perspective, it is important to note that the local manufacturers of these three companies seem to be well managed and profitable, and therefore not in need of a bailout. They are therefore likely to continue even if their parent shareholder should change in future.
Sir Mark Moody-Stuart, chairman of Anglo American recently suggested that mining companies should use the global slowdown to pause and plan carefully in order to be ready when the economy picks up again. Perhaps automakers should do the same. And whether it will be through bankruptcy or conditions attached to a bailout, we are likely to see a few less gas guzzlers on the road in future.
