An Auto Bailout?

This entire financial crisis is getting much worse and is far from over.  In the last few weeks there is an increasing discussion that the U.S. needs to bailout the big three U.S. auto manufactures; GM, Ford, Chrysler.  According to reports, the U.S. auto industry involves 1 out of 10 workers and that more than 3 million jobs will be jeopardy if these corporations are out of business.

Here is the issue, while these companies are responsible for so many jobs, they are doing an awful job at running their businesses and this potential bailout will not solve their core problem of inefficiency, poor performance, poor prouct quality, lack of new technology adoption/creation.  These car companies have been failing for several years now, so this is not a new challenge, but a challenge that has been significantly enhanced in the last few months.  You could argue that we are bailing out banks and other financial industries, so we should do the same with the big three.   The big difference is that the financial institutions are in an industry that was growing, have well educated and experience employees, and have mostly been acquired by other institutions.  The bailout of the financial services is really a correction for lack of federal oversight of mortgage backed securities and very loose mortgage underwriting guidelines; these two items can be corrected in the very near future.

If there is bailout of the big three auto companies, the big question is how are they going to fix the broader more complex issues?  There has to be a strategic plan that is provided to the fed indicating a drastically new approach to a long term sustainability of their companies.  They need to focus on how they are going to be investing significant funds in new technology (hybrid, fuel cell, biofuel, electic, etc).   Specifically, they need to provide a game plan on how they are going to compete with Toyota, Honda, Nissan, Japanese auto manufactures, who are continue to increase their market share in the U.S.  Based on an event I recently attended, Shai Agassi CEO and Founder of Better Place, indicated that he provided an opportunity to several U.S. auto manufactures to be involved in his company and these unnamed companies declined to participate and Nissan/Renault made the commitment and looking really smart for doing so.

I don’t believe the management teams of the big three have the vision and aptitude to turn their companies in a new direction in a short amount of time.  If we do bailout these companies, it will certainly help our current financial condition by providing a bandage, but will not solve the multitude of problem these auto companies face and the money they might receive will certainly not solve their main challenges.

A long term solution for the more than 3 million auto employees: bailout funds need to fund training for the soon to be laid off auto employees to translate their current skill set to other manufacturing positions in other industries, specifically, solar (panels), wind (turbines), and electric utilities (new smart/automated grid).

Declining U.S. market share and increasing foreign market share:

U.S. Market Share by Manufacturer

May 2007 May 2008
GM 23.8% 19.3%
Toyota 17.2 18.4
Ford 16.5 15.4
Chrysler 12.8 10.7
Honda 9.3 12.0
Nissan 6.0 7.2
Hyundai 4.6 5.6
BMW (includes Mini) 2.0 2.3
Volkswagen (includes Audi) 2.0 2.2
Mercedes (includes Smart) 1.4 1.8

One thought on “An Auto Bailout?

  1. Very interesting post, thank you for sharing.

    In reading your sentence of “core problem of inefficiency, poor performance, poor prouct quality, lack of new technology adoption/creation” as the issues facing the auto industry I have to agree with the technology aspect of it, but from a different angle.

    The words innovation, client-centricity and arrogance come to mind as the real problems facing the U.S.A auto manufacturers.

    Once GM, Chrysler and Ford made it to the top of the heap in the 1980’s, their arrogance led them to stop asking their clients and potential clients what they dream about in a car, decided to keep building massive gas-guzzling cars and have not invested in innovation in terms of lighter cars, smaller cars, none-gas powered cars, etc.

    Only arrogance keeps a company from stopping to listen to their clients, leading to lack of innovation.

    While new auto manufacturers emerged in the 1980’s, such as Hyundai, or established auto manufacturers have re-invented themselves in the past few years, such as PSA Peugeot Citroen, the U.S.A. auto manufacturers either kept their blinders on ignoring the fact that their competition is eating up their market-share in their own back yard, such as Nissan assembling cars in Ohio, or stopped fighting for global market share and just enjoyed the profits on the U.S.A. market.

    Given the 10-year economic cycles that have been happening in the U.S.A. since the 1920’s, it was very short-sighted of management, R&D, sales and marketing executives to not realize that eventually clients will stop buying cars that are too big, too heavy, inefficient in terms of gas consumption and the lack of innovation of internal/external/motor design would eventually lead to a halt in profits, revenues or worse the U.S.A. auto manufacturer to become extinct.

    This leads to a macro-economic and socioeconomic issue of flexibility of the U.S.A. manufacturing workforce. When was the last time a new auto company was born in the U.S.A.? Look at countries like India and the Czech Republic and you will see new companies popping up because they are hungry to improvements, are not arrogant and can put their ego’s on hold to say yes I want to hear from my clients and no I don’t know every thing.

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