Should the US’s big three motor manufacturers be treated like startups?

Creeping out from under our metaphorical rock, we could be forgiven for thinking that every  politican, economist and hedge fund manager in the world has been hit with a bad case of mad cow disease.

So when we see a bit of sense prevailing, its time to sit up and take notice. However, what just a few months ago was easy to understand and proclaim is common sense is now not.

Voltaire once said “Common sense is not so common”.

Frankly, I don’t think that there’s much sense in common sense either anymore.

Consider the big three motor manufacturers in the USA and their highly anticipated $25 billion bailout. You know, the one that didn’t go ahead.

Here’s a summarised version of why: “Until we can see a plan where the auto industry is held accountable and a plan for viability on how they go into the future – until we see the plan, until they show us the plan, we cannot show them the money.” [via Dealbook]

At the face of it, it makes perfect sense [?]. I think I actually breathed a sigh of relief when I first read it. They’re not totally mad. They’re still looking at viability rather than throwing good money after bad. Phew.

But then I thought about it a little bit more. So they don’t get the funding. Sure, it’s just like evaluating a startup – you can fund it as long as it has a sound business model, right!? Yeah, why not treat an industry that’s been going for around a century just like you would one that is barely off the ground. [so much for that common sense thing].

But there’s one more tiny little eensy weensy factor at play here. How many thousands of jobs are at stake? Families and communities affected? It could bring a grinding halt to a significant portion [relatively] of the USA’s population. And what’s that worth?

$10 million?

$10 billion?

$100 billion?

Your guess is as good as mine. I’d like to think they’ve taken that into account in asking for viability models before agreeing to the proposed funding. Maybe it’s a calculated risk, maybe it’s a flatout gamble [keep in mind that these companies have global presence, meaning the impact will be felt almost everywhere].

Fact is, surely value is just as important [if not more so] at a macroeconomic – BIG PICTURE – level as it is in a littly bitty microeconomic small-scale example.

I know there are a lot more factors at play here [one of main ones being how they scaled up when the going was good when it could obviously not be sustained]…

- and clearly now it will cost everyone in some form or other [whether taxpayer money or people's jobs] -

… but I have to say that I think they’re overlooking something. Yes, it has to be viable. Yes there must be a plan! But for crying out loud, if your unemployment levels jump exponentially and the ripple effects drive right throughout your nation… maybe the common sense answer isn’t the right one.

Do you think they’ve made the right decision here?

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This entry was posted on Tuesday, December 2nd, 2008 at 4:21 pm and is filed under Think. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

  • Darren
    Yes, agree totally with what you're saying here.

    On the auto side, ironically one of the innovative companies trying to create fuel-efficient cars - Tesla, backed by South African Elon Musk - is also looking for a $400m bailout [http://gizmodo.com/5106976/tesla-needs-a-government-bailout-too] and has also struggled to get their product successfully off the ground.

    On the money side - it's true that profit has been the sole motivator of capitalists for a long time now. I believe the current fallout is a result of this and is good reason to make substantial changes to this way of thinking. Realistically it won't happen anytime soon, since short-term money [generally] motivates people far more than long-term value. And we all pay the price.

    But I still believe the way that the cracks in the system that was thought to be so perfect are now going to pave the way for more creative and long-term value-focused thinking in business. Can't wait to see that start happening!
  • In the end, for the larger companies, it's all about profit. For example, MWEB: within the last few years (despite the introduction of ADSL/fiber to SA), their marketing managers were discussing how to push dial up to the market, because rand for rand, dial up is more profitable than ADSL.

    I don't know if you've seen Fight Club, but there's a scene early on, where the narrator describes "The Formula" that his company employs - and how, if it's more expensive to recall faulty cars than to settle potential lawsuits out of court, they don't do a recall.

    The primary motivation is profit - always. Heck, they taught us that in business studies. And for the Big Three, the more profitable route all round was to sell more expensive, heavier cars. More profit, more tax, more gas bought at the pumps - makes sense all round, for everyone involved.

    Speaking purely as an outsider, I'm not sad to see them go. There will always be a market for transportation, and if they can't provide the necessary service, then I'm sure other, more visionary companies will come to the fore and offer lighter, more efficient vehicles.

    I also don't think that if they spent a reasonable amount on building lighter cars, that their [Big Three] sales would have been so badly affected. I think if you speak to a bunch of people in the States, there's been a market for these fuel-efficient hybrids for a while now - and instead of buying local, these people bought Japanese cars instead, for exactly that reason.

    As for South Africa, we import just about everything, lol. But the one thing we don't import - telecomms - is starting to pick up some serious competition from Neotel. Their next product (NeoFlex) is going to kick some serious ass when it gains widespread use, and Seacom arriving will only push that new frontier further. So yes, let's hope our local companies learn from the Big Three and their mistakes ...
  • Darren
    Hey Wogan, thanks for the great comment!

    Although it now looks likely that they will be getting about $15bn in funding to tide them over, can't say I disagree with what you say.

    In fact, your comments raise an excellent point regarding innovation - as you rightly say, they don't want to die. But they have not adapted [sufficiently] either.

    Perhaps capitalism and the structures that we build remove our incentive, and perhaps even ability, to innovate meaningfully. Granted the vehicle market has evoked excessive consumer consumption of cars, with people having bought new cars very regularly simply because they could. Now that its not so easy, the market has dried up significantly.

    If those companies had spent more on innovation, the cars would have been more expensive certainly, and their sales the past couple of years would have been much lower. However they would also now be in a meaningful position to offer something much more economical, plus they would not have felt the dropoff so severely since the levels of sales would have been more realistic [prices too] and therefore would be much more sustainable.

    Seems everyone got caught up in short-term thinking. The manufacturers. Lots of consumers too. Now we're paying the price, facing the long-term effects.

    Let's hope other industries also learn a lesson from this. South Africa too!
  • Bearing in mind that everything economic is slowing down, they probably made the best decision.

    USA's auto manufacturers have been putting out expensive, polluting, gas-heavy vehicles for years, while consumers have been demanding lighter, fuel-efficient cars. Now that the market for expensive SUVs and the like is suddenly drying up, it's forcing the auto manufacturers to make a choice - adapt or die.

    None of them want to die, and not just because they employ so many people. If the global population keeps increasing like it has been over the last 20 years, there'll be a massive post-recession market for fuel-efficient hybrids (especially since our oil & natural energy reserves aren't growing at all).

    If they can adapt their processes to build more efficient cars - and show a little responsibility - I'm sure they'll get at least some of the money they asked for. But if they insist on taking their vehicles of environmental death anywhere beyond 2012, then should they really be allowed to survive?

    Yes, it sucks that there are potentially millions of people that could lose their jobs if one of the companies goes down, but let's face it - for the most part, it was their choice to work there. And if (and when) demand for cars picks up again, you'll have a lot of very skilled, very experienced, and very available people on the open job market.

    So withholding the bailout might hurt in the short term, but it'll definitely have a better longer-term impact.

    ~ Wogan
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