Richard Posner and Gary Becker have interesting posts debating the auto bailout. Despite some reservations, Posner supports a bailout. Becker on the other hand oppose it and argues that going into bankruptcy is the best solution to the Big Three's problems. ON balance, I am much more persuaded by Becker's arguments. But both sides make good points and are well worth reading.
This part of Becker's post provides a compelling answer to one of the most important pro-bailout arguments:
GM and the other carmakers have claimed that bankruptcy would have a particularly big effect on sales because consumers would fear that their warranties on the cars they bought could not be honored in the future. Whether this is true or not would depend on whether consumers expect these companies to emerge from bankruptcy in the future as stronger rather than weaker companies compared to a bailout. If they expect bankruptcy to lead to better labor conditions for the company and smaller debts, bankruptcy would give consumers more rather than less confidence that their warranties would be honored in the future. Furthermore, car prices would only have to fall a little to offset any fears about future warranty protection since car buyers are not willing to pay a lot for warranties.
But suppose for this and possibly other reasons, customers did reduce their demand for cars of the bankrupt American car producers. What would that mean? Presumably, they would not stop buying cars, but they would instead shift their demand toward the closest substitutes; namely, American-made cars of Toyota, Honda, Nissan, and other foreign carmakers. Their share of American made cars is over one third and rising, so bankruptcy of the big 3 might speed up this growth in their share. What that mainly means is increased employment of autoworkers in Tennessee and other states where foreign producers congregate relative to employment of autoworkers in Michigan, Ohio, and other Midwestern states where the factories of the American car producers are mainly located.
First, of course consumers will not "expect these companies to emerge from bankruptcy in the future as stronger rather than weaker companies compared to a bailout," nor will they expect the reverse. That may be how economists think, but it is hardly how your average consumer thinks. All they know is that the company is in bankruptcy and that there is uncertainty as to whether their warranty will be good.
The second argument is even worse. Why are "American-made cars of foreign manufacturers" the closest substitute? Some of Toyota's cars are made here, some are not; why are we supposed to assume that these consumers, by and large, would be sure to buy the American-made ones?
Consumers already know there is uncertainty whether or not their factory warranty will be honored. Why assume they would not be aware of events that affect the likelihood of warranties be honored, or that they would be intelligent enough to price after-market warranties into their buying decision?
It appears that you have an elitist and disdainful view of the "average consumer" that may not be supported by reality.
I can't remember how many cars I've owned at the moment, but I've driven the lot of them a total of close to 800K miles and have never had need for warranty service and would not be hesitant in the least on that issue if I were in the market for a new car today.
Beck might as well discuss how many angels dance on the head of a pin, for all it matters.
Sort of a homebody then, Mark?
Dealerships are already having hard times now. Some are closing. But remember, they have multiple streams of income besides new cars/truck sales. They have used car, leasing, fleet and service departments and will count on them to take up some of the income slack. For instance, many have ensured their service departments are going stronger than ever. I'm aware of some shops that provide over 80% of a dealer's non-sales-influenced [incentive percentages paid sales staff] overhead.
I, too, think many US car owners are smarter than a few here have assumed.
States such as South Korea?
With that said, I am not for the bailout. I am for supplying DIP money to assure Chapter 11 can happen and ASBSOLUTELY assure Chapter 7 liquidation doesn't happen, as this will put us in a depression. As for the customer reaction issue...People will not think too much about the bankruptcy. What I mean is, to expect a regular person to think to themselves, Oh they'll come out of this bankruptcy stronger than ever, is giving far too much credit to the average american car buyer who likely had no idea what bankruptcy is. So absent some sort of guarantee they will shy away as polls indicate. There seems to be a simple solution though, give them that guarantee. As long as we're delving into nationalism, why can't the government guarantee the companies will uphold warranties and provide parts as long as they are in bankruptcy proceedings?
I explain my opinion on these two posts...
here
here
A relative recently priced two vehicles with comparable MSRP's - a Honda Civic and a Saturn Astra - for a three year lease. Saturn should have had a real price advantage, as she qualifies for a GM employee discount. But the finance company hears - "Saturn? The brand that could be discontinued in this restructuring?" - and projects very high depreciation. The net result was that the Civic, under a lease that offered more miles each year, was $150/month cheaper than the discounted Saturn.
As you probably know, Chrysler doesn't even attempt to lease its vehicles any more. GMAC has virtually stopped writing leases for GM cars.
It was back in my outside sales days when I racked up most of the mileage. These days I drive so little that the price of gas is a non-factor for me -- but boy would it have hurt back then!
I went from typically .30 a gallon, to .60, to 1.00 from the period covering roughly '72 to '79. The hardship then was getting the suits to up their gas allowance as fast as it was going up -- they were always a few cents behind the curve.
Basically the reimbursement price was based on the cheapest price the VP of sales saw on signs at the raunchiest off-brand station on the way to work (and I think she took the long way to the office to find the lowest prices!).
Just like today when oil goes up gas goes up immediately, when oil goes down gas hovers at the higher levels for, seemingly, ever. :-)
My assumption is just the opposite, that the companies will be stronger after Chapter 11, and the country stronger w/o having to pay for health care for retired former employees not yet eligible for Medicare (presumably mostly in their 50s and early 60s, at ages that most others in this country are still expected to work).
Remember, it is the union benefits and work rules that really make these companies uncompetitive in comparison to the non-U.S. companies making cars here. My memory is that GM is paying some $2k above what these foreign companies are paying in this area per car manufactured. I fail to see how publicly funding that excess will help our economy.
This is absolutely untrue. The inflated number you are probably relying on takes into count the payments made to the big threes retired workers, which being a massive and long traditioned company, they have many of. Soon the UAW will be paying this retirement benefits. Go here to see the number and then go here and here to read more about it. While we do pay more for labor fees, it is slightly more...maybe about 5 or 6 dollars per employee. The reason for their non-competitiveness is there complete incompetence. The union theory is one spouted by right wing hacks looking to simply attack organized labor for both ideological purposes and to attack a constituency that had a lot to do with Obama's election efforts in places like Ohio and Michigan. Now this isn't to say we shouldn't have renegotiation, last week the UAW agreed to wage cuts, but was still shot down by Republicans, but unions are NOT to blame. This is a myth that is being distributed for political purposes.
If you're paying cash, that would be correct. Otherwise, someone seeking financing may have a tougher time of it; the lack of warranty (and assurance that the car would be fixed, regardless of what mechanical problems may come) would increase the risk to the lender. The interest rate would go up, or they would just refuse to lend.
That said, I think that the average American car buyer knows the difference between liquidation and reorganisation. If not, the dealers - who are eager to sell cars, too - could certainly explain the availability of warranties to potential buyers. It's not like these people are buying the things over the internet; they usually walk into a dealership, take a car for a test drive, and discuss warranties and financing.
I'm guessing that Becker's making the assumption that most Japanese cars bought in the United States are actually made in the United States and if American consumers buy more Japanese cars, it's more likely than not that the car was made in the United States by an American worker. I don't know if the first assumption is correct (I've heard that some "American-made" cars are actually largely made in other countries and then shipped to the United States for the final touches) but if it is, then the conclusion strikes me as reasonable.
As if the UAW were not responsible for those excessively generous benefits packages in the first place. That the Big Three didn't extract much larger concessions from the UAW at least as far back as the 1980s is part of a broader pattern of mismanagement in the face of vigorous international competition.
Now that the northen companies need help, the academic crowd is all "I hate the north, they convict their black mayor. And besides, I love to dive a toyota and my wife likes her volvo. US out of Iraq!"
As if the UAW were not responsible for those excessively generous benefits packages in the first place."
And what benefits package would you, in your position, submit is appropriate? Aren't you sort of presumptive, determining down to the dollar, what compensation others should earn? Can they vote on your salary?
I agree with above, what exactly is "excessively generous" about them? Please explain further.
That doesn't follow. It again assumes that consumers think like economists, so that the value of a warranty to the consumer when purchased separately is equal to the value as part of the purchase price. Most human beings who are not certain kinds of professionals don't think that way; the world is not made of perfectly logical Mr. Spock clones.
And also, I'm skeptical that the amount a consumer is willing to pay for a separate warranty is comparable, anyway. Separate warranties are often additional coverage or include additional coverage compared to a standard warranty and this may just show that there's no market for additional coverage.
I'm also reminded of the Market for Lemons (applied to warranties, not to cars). Separately purchased warranties are a lemons market; dealers prefer to sell ones that are a bad deal for the consumer, and consumers have limited ability to tell if a warranty is worth it. The result is that dealers will mostly offer bad warranties and consumers will assume that any offered warranties are bad; any good warranty won't sell. Thus, the amount that consumers are willing to pay for warranties doesn't show how much the consumer values a good warranty at.
There would not seem to be huge entry barriers to that industry.
If that is the only difference between buying a minivan from, say, Chrysler vs buying one from Nissan, the market could accomodate for that, no?
Have any academic economists/Wharton School-types done a credible analysis as to exactly why the Big 3 are so non-competitive? Is it, in fact, the union contracts?; is it that foreign governments subsidize their auot-makers?; is it managerial incompetence?
What the VIN number doesn't tell you is the engineering and design and part input by suppliers in 1, 2, 3, J or K etc.
The Japanese in particular had their domestic Japan suppliers come over to the U.S. and through joint venture or purchase or otherwise extract all knowhow and trade secrets and then return the infomation to Japan for the manufacturers design and development in Japan for their vehicles assembled both in Japan and the U.S. In addition U. S. suppliers trying to break in directly to the Japanese market were hindered and even excluded through both government and manufacturers red tape and other disincentives. Without even addressing the manipulation of the yen dollar relationship, our governments CAFE efforts and our governments lack of action on a meaningful gas tax and other actions and inactions. The playing field has not been level for a long time. An economist can examine the current state of the industry in the ivory tower vacuum of a collasped financial market and make pronouncements. But the full story has many chapters and politicians ought to look in a broader context.
And what benefits package would you, in your position, submit is appropriate? Aren't you sort of presumptive, determining down to the dollar, what compensation others should earn? Can they vote on your salary?
If you want my money, then I get to set the terms. If I were begging the government to bail me out, then yes, you could vote on my salary.
If the UAW wants my money, let me vote on how much they should be paid. If they don't want my money, stop begging the feds to tax me to get it.
Simple really.
Putting aside the option of bankruptcy, which perhaps is advisable, what do you think of folding the Big 3 into one company? This would mean essentially dissolving what's there and taking the best pieces of each (most efficient, most respected, most talented, etc) and putting them together using government loans to finance the transition.
I like Mitt Romney to chair a team to come up with the plan for creating "USA Automotive, Inc." Three months to create the template, three months to communicate it and get reactions, three months to "rework it". All the while we would have a separate team of change and transition management experts getting ready to step in when the plan is launched. And a third team whose job would be to create the game plan for "cushioning the shock" from an economic impact standpoint for groups and communities.
We hardly need these 3 competing with each other any longer though once that WAS important. With a brand new "USA Motors" maybe it WOULD be able to compete in world markets. As was suggested elsewhere, this new organization could take on existing warranty obligations from the carmakers.
A purchased warranty is basically a form of insurance. Insurance works for the company because it can spread out the risk over a lot of customers; the company pays out to some and gets money from some, and it averages to a net gain for the company.
However, if the manufacturer goes bankrupt, it affects all the customers at the same time. There's no spreading of risk--either the company goes bankrupt and leaves a lot of stranded buyers, and therefore a lot of extra claims, or it doesn't, and there are no extra claims.
Maybe I am being dense:
but I thought the main argument against Chap 11 is that no one would trust a warranty from a car company under Chap 11.
Now if there were an independent (and presumably solvent) entity selling and servicing warranties for car-buyers who wanted one, then people could buy the cars from the auto retailers, then go out and buy a warranty (like a home buyer buys homeowner's insurance) and not have to worry if their dealer is going to be around next year (just like if I buy a home, I don't worry that my builder might go bankrupt in two years).
I do not see the necessary connection between auto retailers and warranties on vehicles.
Now there may be something deeper in the business model that precludes this arrangement. For instance, the retail price of the car would in my scenario have to be discounted to that of an "AS-IS" model. This might be cost-prohibitive, I suppose.
Of course, this assumes that the standard warranty from the car company still applies and the warranty from the third party company is bought on top of it.
If the warranty from the car company doesn't apply, then as you say the price of the car would have to be discounted to that of an as-is model--but more importantly, that now means the manufacturer has to cooperate by selling cars without warranties. Selling a car with a warranty, rather than separating the car and warranty, is a form of bundling which benefits the manufacturer, so manufacturers would refuse to separate them.
Iow, let's ensure they actually are failing, and this is not a temporary appearance of failure only, due to the general finalcial and market climate.
Problem is, virtually all the indications are that this is a systemic failure on the part of the big-3 and the UAW. Hence, Toyota and others are still viable, while GM, Chrysler and Ford are not.
If I were a conservative southern senator I would certainly think it's the government's job to negotiate for lower wages for middle class American workers with a private corporation. The same idea certainly doesn't apply to management pay. That would be socialism.
Problem is, virtually all the indications are that this is a systemic failure on the part of the big-3 and the UAW. Hence, Toyota and others are still viable, while GM, Chrysler and Ford are not in their current condition, hence (chapter 11) bankruptcy proceedings make all the sense in the world. This is about the big-3's and the UAW's failings, not the failings of the auto industry as a whole.
The big 3 going bankrupt will help the economy in two major ways. First, it will take a lot of imaginary wealth that doesn't actually exist out of the system. Second, it will allow the remaining real wealth to do its job -- intelligently allocate scarce resources.
Put another way, the big three have wasted too much *real* wealth over the past decade. Stopping that can only help.
I think the real lesson from this "downturn" may be that we didn't just miss a small detail. It won't be that every once in a while, you have to have a downturn. I think it will be that financing businesses through easy debt is at least as foolish as financing a household the same way. Worse, it makes it too easy for physically-scarce resources to be devoted to wasteful pursuits rather than efficient ones.
For example, I'm very receptive to arranging laws to that consumer warranties and obligations are given priority in a bankruptcy. Anyone who had gift cards or merchandise credits to companies like The Sharper Image and Mervyn's know what I'm talking about. This will allow companies to continue to operate more normally before and during a bankruptcy.
The warranty protection should help the big three as well. I might even support a Federal Warranty Guarantee system, though it would take a lot of work to figure out how to do such a thing sensibly.
Also, if federal pension guarantees need adjustment to solve this problem, I could see myself supporting such things. I don't want to make the employees victims any more than necessary.
I think using half the money the bailout would cost to soften the blow of bankruptcy to innocent victims would be much smarter. It would be more cost-effective, and we wouldn't be bailing out a capital-wasting, resource-destroying auto industry again in six months.
Looks, I think the automakers should be allowed to fail, just not now. The economy is in shambles, and we just can't afford another major hit.
The better solution is to make the automakers pay dearly. The conditions of the deal should be:
- Automakers declare bankruptcy
- Shareholders and bond holders wiped out. Government owns 90% of company and exercises control.
- Top 2-3 layers of management get fired with no severance (it's their fault after all)
- Renegotiate union wage rates and work rules consistent with what Toyota workers in the US get
- Reduce (but not eliminate) pension obligations
- Mandate implementation of tight fuel efficiency standards within 5 years
- Mandate that 100% of equity to be sold back to public in 5 years
So the companies get hit hard and pay the price, the new companies would be vastly more competitive, and the US economy and environment benefit.
Yes, the US auto bailout should be implemented.
For more political analysis blogs.
So the cure for Detroit making cars people don't want to buy is to force them to make cars people don't want to buy?
Saving the healthier two is easier than saving all three. It's triage time.
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