U.S. Car Makers bailout fails

This is a really difficult one. Do you save the U.S. car makers from oblivion, or do you use taxpayers money to rescue them? The Democrats were clear – give them the money. But the Republicans, either for sound economic reasons or political spite, have blocked the bill to fund the car maker’s recovery. So could it be ‘Goodnight Vienna’, for at least two of the big three?

This is one of those ‘Rock and a hard place’ calls. In truth, the U.S. car industry has blundered on for so long doing much the same thing – building poor cars that drank like a rabid man. They didn’t seem able, or willing, to see the writing on the wall. The huge success of Japanese cars, and the popularity of European imports, seemed to have the most marginal of effects on their business plan. I guess they figured that there were always going to be enough dinosaurs and red-necks who only wanted what they’d always had – junk.

Bailout fails for U.S. Car Makers

Of the three, Ford is best placed. It’s not about to run out of money, although it’s in a pretty precarious position. It has the benefit of not relying completely on its domestic market. It has a range of cars in Europe and beyond that can be made suitable for the domestic market. Indeed, it already has plans in place to make Ford worldwide ‘One Market’, with the successful, smaller, better made and more economical cars from Europe and beyond infiltrating the domestic market. But Chrysler and GM are hopelessly lost in a hugely outdated business model.

The final stumbling block for the bailout was the refusal of Unions to put members’ wages on a par with non-unionised wages in foreign-owned car plants in the U.S. Without that cost saving the chances of saving GM and Chrysler would probably be doomed anyway. But you can’t blame the Unions for the collapse – that is entirely due to the lack of foresight and investment by the management of Chrysler and GM. But it didn’t help.

The collapse of GM and Chrysler, which is imminent, will have massive implications not just for the domestic market, but also for economies worldwide. But maybe it’s for the best. Yes, governments are duty bound to help big employers through exceptional circumstances. But they should not be in the business of running non-competitive businesses just to save short term pain. Governments can’t run businesses.

Without the incentive of profits, and the fear of failure, capitalism doesn’t work. You only need to look at formerly state-owned U.K businesses for that – BT, BA, Jaguar et al – to see how hopeless a state run business can be. And look at the mess governments make of health, education and just about anything else they run. No, everything works better when the incentives of success are interwoven with the costs of failure. Take that away and we have a failure – guaranteed.

Better short term pain for long term gain.