Bailing the Big 3

The US Congress yesterday put off any bailout of the “Big 3” auto-makers and sent them back to their oak-paneled dens until they come up with better arguments. GM, Chrysler, and Ford had been looking for a $25 billion bailout of the industry, waving red flags warning that at least GM will have exhausted money by the end of December, and both it and Chrysler might be going into receivership by that time. Ford apparently has a bit more cash flow, but isn’t far behind.

Talk about shooting yourself in the foot. The executives that turned up in Washington to plead for money just don’t have a clue. The executive offices of corporate America (not to mention Canada) have become so used to big-bucks salaries, Brooks Brothers suits, and chauffeured lifestyles, that when they have to humble themselves and come with cap in hand to government, they just don’t know how to behave. They might have gotten a warmer reception had not someone noticed that they all arrived on luxury corporate jets for the Washington meeting. Beggars apparently still can be choosers, and in their case Marshall McLuhan was quite correct: the Medium is the Message.

Now no doubt there are some who will say that these are important men, that in a time of crisis, every minute of their time is needed in the business, and that travel on corporate jets was the best way to get them to the hearings and back in a speedy fashion, so they can get back to work coming up with where their companies need to go in the future, something a little better than more cup-holders with glowing rims. While that argument might be true, there are times you need to present a better image to people who, frankly, aren’t too impressed with your performance to date, and are all too willing to shake their heads and show you the door.

There has always been a message that as auto-making goes, so goes the nation. As some of the largest companies in both Canada and the US, the auto-makers have been in the position where the lines must be kept rolling at all cost– too many people employed, too many interlaced support industries, too big a machine to ever bring to a halt. Now it seems that at least the US government is willing to question that premise. Faced with an almost constant plea for money, money, money since this economic disaster landed on most of the world, their lawmakers are starting to take a tight hold on their purses. At the moment they’re concerned the Big 3 will take the $25 billion and cruise off into the clouds in their Lears, and in March be back asking for more, having done nothing but prop themselves up for a while as they fill more parking lots with SUV’s and “Crossovers” that aren’t selling.

“Maybe it’s time for some collapse,” seems to be a thought on some minds. Maybe it’s time for only two major car companies in America—maybe it’s even time for only one. Maybe it’s time for at least one of the companies to sing the Chapter 11 Blues, and be forced into restructuring and strict performance requirements.

Why are they in this mess? Certainly the “why now?” is the current economic situation. News reports this morning bewail the situation that “there are no buyers”. This is for the global stock market, but certainly reflected in everything else as well. No one wants to go out on a limb in these uncertain times, so housing starts, home sales, auto purchases, etc., etc. are all down. My local community is poised for next week’s normally lucrative lobster season, with fear in the heart of every fisherman that the buying of lobster is just one more thing that people are suddenly unwilling to do.

Pick up any copy of Consumer Reports Annual and check the automotive listings. Look for the list of best buys in used cars, those reported through their lifetime as being most reliable. 90% of them are imported vehicles—Toyotas, Hondas, Mazdas, etc.– vehicles that have demonstrated great reliability. Read the satisfaction reports on vehicles, and the imports always come out well ahead. Why? Why are they always beating us at our own game? Ever see an American car manufacturer touting high mileage, regularly running the things up to 300,000, even 500,000 kilometers without major failures? Freaks of nature if they happen to do so.

I recall an old commercial where a fellow is laying on the wax on what is obviously a Chev in his driveway. “Love the car!” he says. “Had six of them before this, and my next one will be the same!” In the background you can see a fellow pulling into his driveway with a Volvo, perhaps one that he has kept, or will keep for a decade. “If they weren’t a great car, why would I keep buying them?” asks the Chev owner with a puzzled look on his face.

Why indeed?

North American automakers have been producing a fair amount of crap over the last decades, and a lot of that attitude has come back to haunt them. Lee Iococca, former head of Chrysler, once was taken to a meeting in one of their lesser vehicles, one built on the famous K-Car chassis, and when exiting the vehicle he affirmed this sentiment with, “No wonder we’re in trouble, producing crap like this!”

“Planned obsolescence” — a term we got from, or at least identified with, the auto industry. Components that, by design, would last for the warranty life of the vehicle and then die an expensive death. Body panels that until at least the last decade, would rust through before the engine decided to prematurely quit.

We have tremendous loyalty to our Chevs, our Fords, our Chryslers, but they really don’t have a reputation for being great vehicles for the money they cost.

There is something to be said about autoworker wages in this situation. Experienced workers reportedly make $60,000 and more with overtime and bonuses. Everyone knows that the imports pay far less to workers overseas, but they are also willing to pay less here. A current news report on the new Honda factory in Marysville, Ohio, indicates they are offering $15.35 an hour to workers, with gradual increases to about $20 an hour with experience. That’s close to half the wages likely to be paid at the Big-3 companies.

Wages of executives, though they are few in comparison to line workers, are sometimes staggering to most of us. I’m not one of those who feels, “Well they earn it. High pressure, big decisions– blah, blah.” A different world, but I suspect no more stress and difficult decisions than the owner of the neighborhood convenience store who’s trying to keep bankruptcy at bay and make enough to actually say it’s “profit”.

I’ll include a quote to give you some idea of this stratospheric realm. This from an article in the Wall Street Journal, commenting on the salaries and packages for GM CEO Rick Wagoner, and Ford CEO Alan Mulally:

The Securities and Exchange Commission filings reported earlier this year that Mr. Wagoner, the company’s chairman and chief executive, was given a 33% raise for 2008 and equity compensation of at least $1.68 million for his performance in 2007, a year for which the auto maker reported a loss of $38.7 billion. The salary increase puts Mr. Wagoner’s salary for this year at $2.2 million, compared with $1.65 million in 2007.

In addition to his base pay, Mr. Wagoner was been awarded 75,000 restricted stock units valued at $1.68 million, based on GM’s closing stock price in March. He was also given stock options representing 500,000 shares
But GM officials insist those reported figures need context. In 2006, Mr. Wagoner took a 50 percent cut in his base salary pay, according to company spokesman Tony Cervone. And Mr. Wagoner’s overall compensation is down drastically from 2003 when the CEO made $8.3 million in compensation from salary and bonuses alone, according to figures cited by the company. Much of his overall compensation is also “at-risk,” or tied to the stock price of the company which has plummeted, Mr. Cervone said

In April, Ford reported Mr. Mulally received $2 million in base salary, a $4 million bonus and more than $11 million of stock and options in 2007. His base salary was unchanged over 2006. Mr. Mulally has earned nearly $50 million in compensation since taking the helm of the auto maker..

And so they, or their underlings, fly into Washington in the corporate jets and come groveling at the congressional hearings. What will be the result of the bailout plea? I guess we will see. Much of the decision is now likely taking place at the level of lobbyists who will be pressuring every member to support the bailout without any undue restrictions on the automakers. By the time the executives arrive in appropriate executive class commercial flights for the next meetings in December, the groundwork will have been laid and the congress should be fully aware by then of their importance of the Big 3 and why they just HAVE to bail them out for another era of poor performance.

I mean, if they weren’t making great cars, why would we all keep buying them?


5 thoughts on “Bailing the Big 3

  1. Not much sense in a bailout unless it comes with strings attached forcing a marketing plan that calls for change,including the C.E.O. who has his hand out.
    The Chrysler bailout about 30 years ago worked.The Goverment said no to Chrysler’s first request and told them to come back with a plan, and they did, and it saved a lot of jobs.

    Hopefully, if the governments help the auto industry again, and they probably will, it will force a change in the type of automobiles made in North America. It is probably the auto industry’s last chance to go lean and mean and try to manufacture a product that will be ahead of the curve, maybe even put more effort into building enviromentally friendly buses and mass transit, along with greener user friendly cars.

    The North American Auto Industy probably doesn’t deserve a bailout, but we are all going to feel the fallout if the industry in Canada and the U.S.A. shuts down.

  2. Great post…if a bailout comes the government needs to put major restrictions on the money. Look what happened to the bailout of some of the banks. One took the money to China and bought a bank there. Require them to use the money to have their complete line using an environmentally friendly fuel source within 10 years. Definately the fat needs to be trimmed at the big three. Thanks for a great post…an excellent read.

  3. All this is very familiar. Same situation over here, and probably everywhere. Same complaints about the fat cats, etc. ‘Twas ever thus.

    Meanwhile Gordon Brown battles on. New initiatives every other day. Today most shops have notices about the reduction in VAT.

    Meanwhile, too, most people in Britain watch hopefully all Obama’s doings. May the great burdens he faces not be too much for his shoulders, for we all look to him with high hopes! May they not be dashed.

    Good reading such a clear and quirky point of view.

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