Ask YC: To save GM or not?
I wonder which is better the government has already approved 25billion to save GM but GM wants more.
GM is a company that has been struggling for a decade vs. global competition because it refused to innovate. Pumping in 25-50 Billion might save 3 million jobs, but are there other options.
Would putting $100 Billion into auto company startups be better? The companies that come out of that would most likely get most of GMs assets on the cheap.
what do you think is better, give GM another chance or let bankruptcy create a fertile ground for a new kind of car company to come in and do better.
or maybe, there are a ton of problems like warranty enforcement and replacement parts that would be VERY disruptive. I just don't like the idea of us having Government owned companies.
73 comments
[ 2.5 ms ] story [ 142 ms ] threadinstead, use that money to fund grants and initiatives and prizes to incentivize new companies or GM itself, provided results are produced. that way, the industry will move forward. a bailout would almost definitely result in stagnation for many years. imo, ofc.
the bad companies will go away and other companies will take their place, providing new jobs.
From inane Union concessions (job bank) to executive compensation and stupid parts contracts, the domestics are shackled with the cumulative damage from decades of mismanagement. Bankruptcy is the tool they need in order to actually recover from the mistakes they made.
When you start talking about dissolving large scale manufacturing enterprises, however, there are people that start asking who will build the tanks in the next large war. I don't understand the military aspect of that but I suspect if all of the plants go foreign owned they'd just be nationalized in the event of a crisis. Maybe the bailout is the nationalization and they're just thinking ahead -- I don't know.
Also, when people argue about how if GM fails then all these jobs will be lost--remember this: Detroit still has leftover production infrastructure for light rail. Not a whole lot of retraining necessary, and it would work with the inevitable Keynesian domestic spending we'll have.
The fact that these US automakers have blocked legislation to make cars more fuel efficient because the profit margins are gigantic is ridiculous. They are wholly responsible for their failure while other car makers around the world are creating better cars and not, you know, going bankrupt.
Isn't Chapter 11 bankruptcy made exactly for this?
The trouble now is the loss of jobs and the effect it will have on our economy. I have some trouble with this, but I also feel like these people could be better used creating and working at companies that progress their products, and not produce the same SUV across all of their lackluster brands.
If they just died we could move onto the next stage of creative destruction, and those car people would build cars using alternative fuels, electric cars, fuel effecient, cool looking cars (not buicks, SUVs, and La Sabres).
However, I think we have to consider that if America stopped making cars then we'd just be sitting ducks for all the other manufacturers out there that are doing fine. Toyota, Germany, the Chinese, and Koreans. I think they'd just dump cheap imports on us, and we wouldn't get an environment where entrepreneurs could innovate new products without competition from larger manufacturers.
So I think the die argument, even without considering the pain of job loss, is naive to think we'd get better products made by American companies. I'm not convinced we would be better off letting them die.
Startup idea wouldn't really work, it costs way too much money to bring a car to market, and there aren't that many startups in the automotive space, Tesla is pretty much it.
Personally I'd want GM/Chrysler and Ford to go into a joint venture for a new brand to sell a full line of electric/hybrid vehicles. The space is too costly of an investment to take on by one company. This way they can spread the risk and work together on the same technology. And people looking for electric vehicles wouldn't be locked down into funky looking hatchbacks as their only choices.
I would be happier about a bailout with those sort of strings, but in general, reading that Executives at these car co's have been deriding climate change evidence and the need for hybrids/alternative fuels, makes me skeptical that refunding these companies is the best way to fix the car problem.
On another note, this stuff sucks. Everyone loses if we bail out poorly run companies, but there's a very high cost to letting them go under. Good luck, Mr President-Elect.
It sucks for the people in Detroit and Michigan as a whole. Their education system has not yet caught up to the fact that the name of the game is "value added".
Also, now that "peak credit" has hit (shortly after peak oil last december) I do not see the trend of American families buying a brand new car every 1 to 2 years continuing. Much more effort is going to have to be spent making your manufacturing base as efficient as possible -- simply because the car buying cycle will likely be an "every five-six years" trend from now on.
I think that I you set up a incubator with $200mln for pre-seed VC, with a priority for potentially labor-intensive and/or automotive businesses, you'd see some significant job creation. Not enough to offset GM layoff overnight, but at least the solutions provided will be sustainable.
And even if they did that, the job creation will do no good to the typical worker whose family worked on the same assembly line for 3 generations. Granted some of the jobs will be back when Toyota or Honda or some other successful car company buys GM's assets. But GM is one of the biggest manufacturers in the world, and right now there isn't really that much demand for new cars. I read that last month Honda(whose stuff pretty much flies off the shelf) sold 25% less cars than the year before.
However, when it comes to "normal" companies like GM, I say let'em go bust.
Obama sees them as a key part of gearing up the US to becoming a leader in green cars, but tbh, I think the $50bn would be better spent buying Toyota or something...
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a...
If the "free market" does not think it is a good investment/risk ratio, why let the taxpayers take it?
It buys votes.
I know I'm dreaming. This money is going to be spent selling us the hummer H4 until gas hit $8/gallon, but there are entirely profitable segments of GM that could be swallowed up wholesale. The wealth-incinerating assets should simply die.
In a normal economic situation, a GM bankruptcy would be good news. The company could be held in trust, re-organize itself, and become profitable for (some) creditors.
Right now, credit is tight, investors are skittish, and government resources are stretched. It's not that GM is too big to fail. It's that GM is too big to fail right now.
Maybe the problem is that GM is too big to succeed.
I don't have any capacity for analyzing the pros and cons to this, but the idea of focusing on starting from innovation rather than trying to steer a big, unwieldy ship towards innovation sounds attractive.
Nor does anyone else - especially if they claim to do so.
I think breaking up the company is a good idea if we bail them out. It will spread out the risk and allow the companies to focus on a core market. It will also spread out the risk.
I think it makes sense if each plant was a separate car manufacture. Let them each decide what cars they want to make and give incentives for cars that have over 50mpg, and cost less than $15k. In times like these its time to start a revolution, and the car industry is a good place to start.
http://www.cato.org/dailypodcast/podcast-archive.php?podcast...
Think of it as a bail out of everybody else.
We're going to spend 3,4, maybe 5% of annual GDP to get through this mess. Might as well use some of that to kick the GM can down the road a bit.
Ah - so let them continue to lose $2000 per car for a couple more years, because that'll make things better - meaning what's eventually left is worth even less to whomever finally buys it (likely the taxpayer it seems).
It's not like the government isn't planning to extend unemployment benefits because of the economy.
If GM goes bust now then more people will be on the dole for longer.
The tax payer pays for it one way or another.
If, on the other hand, we shut down GM and put its former workers on extended unemployment, those with the aptitude and will relocate and find similar jobs; those without retrain and join the economy in a different role. The materials that formerly went into unwanted cars will be obtainable more cheaply for other uses.
The point is debatable, but it seems obvious to me that even if some of the GM workers remain forever unable or unwilling to rejoin the workforce, the cost of supporting them will be lower without the inefficiency of supporting a company on top of them.
I've read, but cannot source at the moment, that when federal aid to farms really took off in the 1930s, they did the math and realized welfare to individuals would be cheaper. For a variety of reasons, they implemented price controls instead, and saddled the economy with a persistent market failure in food production that's now over 70 years old.
The other things they need to do is use less labor hours to build a vehicle, increase plant utilization (which is only at 85% right now), and get idle workers off their payroll - yes GM is contractually obligated to pay people not to work.
GM should innovate. They do need to come up with better models. They do need more reliable cars. They do need to be more fuel efficient. However, none of those are really their big problem. GM is still selling nearly as many cars as Toyota. They don't have problems creating popular cars. That's a misconception with many people who happen to dislike GM cars (heck, I think they're complete crap).
The big question is, can GM reduce those labor and healthcare costs? If not, they will NEVER, EVER be profitable. You can't compete with a $2,200 handicap per vehicle. In fact, it's a testament to GM that they have been able to compete for so long with such a huge disadvantage. If those costs can be lowered, GM just needs a small loan (like $25bn) and a few years time. If those costs can't be lowered, we'll be talking about giving them another $50bn in a year and another $100bn in two years.
EDIT: Figures provided by NPR (http://www.npr.org/news/specials/gmvstoyota/)
The Japanese do not produce a car, until they know it is needed. It took the American car companies decades to catch on, and even then labor unions prevent the auto industry from moving from human labor to machine labor, which can be cheaper than even a Chinese laborer.
We can produce cars cheaper than Japan, we just don't want to sacrifice millions of jobs doing it. Where the Japanese have found a way to move forwards. Labor unions have had such a grasp on the airlines, education, and the auto industry its no wonder that we need to consider bailing these industries out. They are the most socialist industries in the country.
If we need to save these industries, I do think we need to use government funds, but shouldn't they be economic development funds? Rather than cash that will be burned on failed employment standards?
Since there are only a few auto manufacturers and the likelihood that there's more than two in your commutable distance is low means that auto manufacturers have the power necessary to abuse their workers without unions.
However, unions became ultra-effective in many places demanding things like pay even when plants aren't used and benefits fit for a king. GM agreed to that because, at the time, the auto industry was really just Ford and GM and the unions were sticking it to Ford too and so it didn't matter so much. That's changed, but the UAW won't face the post-80s reality.
Having workers have no power is bad. Having companies have no power is bad. Having each group have equal power works pretty well.
GM is a factory with a semi-skilled labor force. They produce very expensive goods. Because of this, they don't produce at maximum output all the time. If sales numbers slump one month, they cut production. To cut production, they have to cut their workforce. When they cut their workforce, they don't want to fire someone that has a lot of experience because they may just need him/her next month when sales pick back up again. So they pay this person to keep up a relationship until they need him/her back at work. They may not even pay this person his/her full rate.
Consider that while one car's sales are dwindling, another's might be picking up. Well, a person putting doors on a Chevy Malibu can probably do the same thing on a Chevy Trailblazer. In this case, the worker isn't paid to be idle, he/she just switches car lines.
Even if the worker is paid to be idle, you shouldn't blame the worker or the union. A contract requires two parties. The auto manufacturers made these agreements with the unions, knowing the consequences full well. Why blame a person for wanting nice pay and benefits?
Also, if the auto manufacturers wanted to renegotiate to save themselves, the unions would support it. In the past, the US auto manufacturers have renegotiated union contracts to cut pay. After all, what good is a union if its members have no jobs?
Of course I find it interesting that if I can't make the mortgage due to circumstances I didn't predict, too bad. I can't even discharge that during personal bankruptcy anymore, it's pay the whole freight or get out.
GM entered a set of contractual obligations, didn't predict a future where they could not meet those obligations, and now wants the taxpayers to bail them out, or they get to file Chapter 11 and cut the retirees loose. Taxpayers still pay because those retirees will need more government aid and cost of care write-offs which raise health care costs for everyone else.
All this would be moot if the US health care system were not employer-based, in which case the playing field would be level already, with a big fat 0 for both firms.
I'd also like to see how the $73.73 figure is calculated. The actual wage gap between the two is about 3 bucks an hour (same link) but the total labor cost gap is more than $25 an hour. Does that include healthcare (in which case it was counted twice). If not, that's awful high. Maybe pension obligations? That's way high. Using the quick 50% of wage cost--a common HR WAG when you don't have hard numbers--Toyota should be around $40, so they are high at $48, but GM should be around $46, and they're above $73.
GM also sells a lot of cars not because they're people's primary choice, but because prices for an equivalent car are lower, or the financing is better. Considering GM is losing money per car at this point, I hardly think those lower prices are GM's choice.
My dad is a retired GM employee (33 years), and I can tell you that his base pay was about $28/hr at the end. Granted, the cost of benefits were so high that they were scared to hire too many people, so he got tons of overtime.
In fact, he averaged over 60 hours a week (and often up to 85) the last 7 years he was there (1998-2005), so his annual pay looked pretty darn good with all that time-and-a-half. He accepted a buyout to retire, even though he wasn't really ready to, and as he was leaving they already had most of the plant converted to $14/hr non-union positions.
The days of the platinum health-care for retirees are pretty much over as well. My mom just spent a week at home sick because she didn't want to spend $175 to go to the doctor. When I was growing up we could go to the doctor/hospital for free on Dad's insurance, so this was a bit of a shock to me. Sadly it seems like my $55/mo high deductible plan beats their insurance in a lot of ways.
I'm not saying all this to try and earn sympathy for my parents or blame GM. I just want to point out that it's not all roses for the 'greedy union workers and retirees' either. There has been a lot of absurd crap over the years (like the job banks that paid people to sit in a room all day), but the absurdity goes both ways. My dad has stories about them building cars that had no buyers, just to honor supplier agreements, and then storing said cars in fields until they were scrapped.
As for health care, we'd all be a lot better off if the health care system in the U.S. had some process innovations. However, there's so much bureaucratic red tape that not many people want to tackle that job.
I would consider a government-backed loan or temporary equity stake on the conditions that: - Executives are replaced - The UAW agrees to major contract restructuring or is disbanded altogether (see below before you crucify me) - The companies set efficiency goals for production and sales processes (stop putting out designs earlier and changing them every year)
I also think the government could do things on the demand-side to help. Such as offering tax credits for buying a new, American car
On the UAW issue, please be aware that I'm not "anti labor". Non-union workers at US-based plants (for Toyota, Hyundai, etc.) have comparable salaries, good benefits (including pensions), and negotiating power.
Some good info on all of this at NPR: http://www.npr.org/templates/story/story.php?storyId=9694532...
In Silicon Valley it's, "Start a startup!"
In Michigan it's, "Join the union or!"
A big chunk of that (the $25B floated) could be handed over now in order to design a fuel efficient, safe car with appropriate eco-awareness (hybrid, flex fuel, all electric). This is similar to how military contracts are structured.
The bidding could be thrown open to any company that uses American labor to get the job done: it has to be built here. But Honda/Toyota/etc. are welcome to take part.
If GM can't build the "car of tomorrow" with $25B in startup, they should fail.
IMO, GM needs a major overhaul from their pre-1980 ways. Besides labor unions that were mentioned, they also have an overextended dealer network. Their desire to focus on so many brands with just re-badged cars (they even neutered Saab with this approach) needs to be changed. The Toyota/Lexus, Honda/Acura, and Nissan/Infiniti models show a much better approach.
These are mostly un-skilled labor, who have "thugged" there way into skilled labor pay
Also, if you want any sort of green-innovation in the car industry, they have to go.
If these companies are still straddled with the nightmare of these obligations, no amount of government money will save them in the long run.
Government run "innovation initiatives" are fraught with the same problems as a government owned company (moral hazard, non-market competitive landscape, distorted incentives) and should be considered equally inefficient. Nothing can match the innovation that could be achieved by allowing these companies to be broken apart (a process that began 30 years ago when Toyota started achieving success using standard, outsourced, intermediate goods). Breaking these companies up would create a competitive framework for smaller players to enter. Think about what could happen if you could start a car company without having to hire a single assembly-line worker? It would be like giving the car business a set of APIs.
1) It's not either/or. GM can declare bankruptcy, renegotiate their debts and expenses, ditch ideas that are not working, and come back as a smaller, kick-butt company.
2) If you go here then it's just a big political hand-out for whoever has the most contacts. It's not a financial bailout anymore. Be honest about it, and expect a lot more applicants.
3) So you spend our money to bail out some business or sector. What is the evidence that the underlying problem has been fixed? I know Congress can attach a lot of feel-good riders onto the deal, like more green energy and better employee benefits, but what assurance is that? Are we fixing the problem, or just putting a band-aid on a gaping wound? 'Cause I got a funny feeling that if you write them a check this year, they're going to be back in a year or two.
They're an important company, and I hate to see them go. But I hate even more the idea that some companies are "too big to fail". Times change. If GM is able to change with them, then that's great. If not, then that sucks. But we don't have buggy-whip manufacturers anymore -- those days are gone. And perhaps the days of super-big American manufacturing companies are going away too. Maybe not. I don't know. But I know you can't force it to work if it's not going to.
2.) Any government funds come with strings attached. Things like developing fuel/energy efficient vehicles(say, didn't we already pour 25 billion into the big 2.5 just this year for that?). Or gut middle and upper management.
3.) Trim the 1inch thick agreements between the unions and the big 2.5.
institute new federal efficiency standards on all cars sold in america. this will level the playing field while the american auto industry retools itself.
pump tens of billions of dollars into research and development to create the next wave of vehicles that meet these new standards.