Wednesday, December 3, 2008

One Business Plan, Two Bailout Plans

Congressional leaders asked the Big Three automakers to show business plans so that Congress could cconsider a Detroit Bailout. Those plans were due today. It appears only one of the Big Three complied.

Ford submitted a plan showing how it could retool and deliver next-generation cars in about three years. It would need to borrow some money in the event that the failure of one of its Detroit competitors took down several of its parts suppliers, but there was a chance that it could finance its transition from its own revenue.

General Motors’ and Chrysler’s plans called for them to wait out the economic slowdown until consumers came back to buy essentially the same products the two companies are having trouble selling now. Those aren’t business plans. They are not about a realistic chance to make a profit. They are bailout plans. They are strictly about the money the companies can get from the government.

A recession that has seen around 10 percent of American workers lose their jobs so far this year (not all at the same time, fortunately) does not explain a 40 percent decline in car sales. Perhaps half of the decline can be tied to the recession. The other half can only be blamed on the products or the way they are sold. In this case, I have to believe the products are the problem. Now that all- and mostly-electric cars are actually being driven, and seem to work just fine, why would a consumer want to take a big risk on a car that runs on a legacy power system?

People pay the premium prices for new cars partly for the prestige, but where is the prestige in a “new” car that runs on old technology? It’s obvious that a significant segment of drivers are holding out for the chance to buy a new-generation car. And why not? For decades, Detroit has been telling us to buy cars that make us look smart. If buying a new car in 2008 means committing to the purchase of 1,000 gallons of gasoline per year every year until at least 2017 (imagine what gasoline prices might be by then!) how are we supposed to make that look smart?

Sales go up and go down in every business. Real business leaders plan for that. GM’s CEO said yesterday that the recent decline in auto sales was beyond anything anyone could imagine. That lack of imagination is the real source of the problems at GM, which until a few weeks ago had planned only for single-digit yearly increases in sales as if there were no other possibilities.

As wrenching as it would be to see GM and perhaps Chrysler unable to restart their factories after they shut down for the Christmas break, it would be irresponsible to entrust them with many billions of dollars just so they can delay that day until March or April. What would make more sense for the country would be to hold on to that money and use it to restart some of the parts makers that may hit financial trouble in a bankruptcy of GM or Chrysler, so that the industry can keep going. If we spend all that money now, there is a risk that the entire U.S. auto industry could be forced to shut down before summer. That is a scenario that can be avoided.