The U.S. Economy Doesn't Need GM

Forbes ^ | Nov 19, 2008 | Blythe McGarvie

[fightinJAG]

Let's look at General Motors as a classic tale of large numbers. What would it mean if GM were to go bankrupt? How significant would it be to the economy?

Emotionally, we may feel General Motors (nyse: GM - news - people ) represents a pillar of our economy and should be saved. But when we look at the facts and rely on industry experts to put them in context, we see an alternative conclusion.

The Center for Automotive Research just released a report indicating that, as of December 2007, the motor vehicle industries employ 732,800 workers and the Detroit Three (GM, Ford and Chrysler) employ 239,241 workers in the U.S. Assuming the worst-case scenario--that all three companies will cease operations in 2009--the report estimates a loss of nearly three million American jobs.

This estimate assumes each direct job creates four jobs for suppliers and 7.1 "spin-off" expenditure-induced jobs.

[Murp]

“I think the collapse of GM could be the last straw”

Free Republic is a bastion of freedom. The demise of the American car companies is a direct result of a government that has run amok. A policy of restrictions on corporations, private enterprise in general and an elitist, socialist mindset that has driven our jobs overseas, opened our doors to foreign companies while seeking approval of Europe, Asia and the third world. Our trade deficit spirals out of control and we are at the mercy of those who hate us. We cannot allow our car manufacturers to fail because of government mismanagment of our economy. Think about it. We are told that the American manufacturers are in trouble because they relied on SUVs and pickup sales, when they ought to have been making small fuel efficient cars. Really? What they were doing is providing the vehicles THE AMERICAN PEOPLE WANTED. It is the green environmental whackos that HAVE CREATED THE SENARIO THAT WE SEE TODAY. With the free fall of oil that may change!! Our Government has prohibited the exploration of oil, the development of coal, oil shale, natural gas and nuclear power plants. THEY ARE CO-CONSPIRATORS WITH AL GORE AND THE IDIOTS THAT FOLLOW HIM. In the name of free trade we have sold our soul to those that would destroy us. We should support our AMERICAN OWNED CORPORATIONS AND TELL THE WORLD TO GO TO HELL. Pass legislation that helps bring our jobs home and at all costs preserve our AMERICAN COMPANIES PROVIDING JOBS IN AMERICA TO AMERICANS.

[tubebender]

Ford and Chrysler buy many of their transmissions from the same supplier as GM. There are many other suppliers to GM that will go down that even serve the rice burners...

[Murp]

“They build great cars”

I assume you really mean “car” when you say “car”. The reason the Big 3 are in trouble is they relied on trucks and SUVs for their profits. Because our sorry ass government wouldn’t allow oil drilling and because our enemies and crooked speculators drove the price of oil to an unsustainable level, the American consumer quiet buying what the Big 3 made. With fuel at a reasonable price, I don’t know ANYBODY WHO WOULD RATHER BUY A RICE BURNER THAN A NICE FORD NAVIGATOR. By the way, Ford makes some great cars now and has some better ones on the way. Check out the new Fusion, Milan, and Focus that will be in the showroom soon. Even Al Gore should like that!!

[cmdjing]

Chapter 11 bankruptcy will not work for the big 3. More appropriately the big 2, as the circumstances for each auto company is different.

Chrysler is terminal, it is going into chapter 7 liquidation, only a matter of when not if. GM is marginal, however it is also unlikely to survive a chapter 11 and if it is attempted, it will become a chapter 7. Ford is salvageable, but only if you save GM. If GM goes into liquidation, the effects will be the same as the sinking titanic, it’s mass dragging Ford into a watery grave along with it.

There are really only two options available, either let the entire American domestic auto industry fail or save GM with a lot of money. The $25 billion that the automakers are asking for is only a temporary salve, they will hemorrhage it out in months. The only way to save Ford and GM in particular is for the government to assume their existing pension and health care liabilities on to it’s own books. Then use that 25 billion to reduce existing overhead such as getting rid of all excess dealers and shedding brands down to 3. One mainstream, one luxury, and one sporty. There is no way to save jobs, as jobs will be cut. There is excess capacity not only with American car manufacturers but also with Japanese and German ones as well. However, this will save the domestic auto manufacturers (2 of them anyway, Chrysler will die) and make them lean enough to compete. I am surprised I have heard no one make this argument yet.

[etcb]

You made some very good points and seem to have a realistic grasp on the situation. Do you know if the foreign companies are still allowed to offset taxes due on profits made in the US by taxes due in their home countries.

[factoryrat]

It’s going to be a sight to behold when GM goes down. The economic carnage will be total and complete. GM will take out most of the parts suppliers with it, forcing the other automakers to find new sources for parts, if possible. The ripple effect will tear a wide path through the economy as 7-8% percent of the U.S. workforce becomes unemployed. This will probably cause the foreign automakers to re-think manufacturing vehicles here, with parts sources drying up, and a collapse in demand. It would be wise for them to relocate to more profitable countries. And most importantly, we rid ourselves of the UAW bogeyman, and all of its retirees and dead weight. Of course 7-8% of the U.S. workforce should have no problem finding work in different sectors of the economy.

The point of my rant is people shouldn’t let there blind hatred for any particular group or industry cloud their reasoning. The auto industry needs to restructure and become more efficient, no doubt about that, but I see a lot of people here cheerleading their demise. Be careful what you wish for. When the auto industry is finished off, the will set there sights on the next unionized industry.

[etcb]

Most foreign trading partners allow American made cars easy entry and allow full American ownership of companies. Japan normally operates with different standards.

Is there any automobile company in Japan that is majority US owned or are there any GM, Ford, or Chrysler assembly plants there? Also, what kind of restrictions does Japan have on dealerships for American manufactures or on import of American made automobiles? Do we really have fair trade and free competition?

[Murp]

I am not educated on the tax benefits for foreign companies operating in our country, other than the local tax incentives they receive to locate in a given area. I do know that when the profits are generated they are sent to the home country. It would not surprise me to learn that federal tax benefits exist for investment in the USA. After all, American manufacturers operating overseas do indeed get federal tax breaks.

Thomas Paine wrote a pamplet entitled “Common Sense”. One thing I know is that when Sam Walton was alive, and that hasn’t been long ago, WalMart advertised that they stocked products produced in America. Now EVERYTHING IN WALMART IS MADE IN CHINA. What happened? What caused this mass exodus of American manufacturing and the influx of foreign goods? China has a two trillion surplus in their balance of trade with us, and Japan another one trillion. FREE TRADE has decapitalized our country and left us in danger of national bankruptcy.

[RayChuang88]

The USA may not need GM, but they will want Ford to survive. Ford has a new, very exciting small car lineup coming over the next 2-3 years that will finally directly compete successfully against the Honda and Toyota offerings, and because Ford has actually demonstrated a plan to improve its product mix it stands a far better chance to get some sort of assistance from the government.

[RayChuang88]

I do think that the Obama Administration will work out a very comprehensive plan to do an orderly (but massive) reorganization of GM that will save the company. What will happen is that we will see GM reduce its entire product line to just three divisions in North America:

Chevrolet--family cars plus Corvette. Its family car line will essentially be the same as the Opel/Vauxhall line sold in Europe, except the Chevrolet Cruze will substitute for the Astra model sold in Europe.
Cadillac--luxury cars from second-generation BLS all the way to the DTS sedan.
GMC Trucks--all pickup and SUV's consolidated into one division.

GM will become 50% smaller than it is now.

[factoryrat]

It would be a smart move for GM. They have too many redundant model lines, and too much internal competition for resources. Focusing on market specific vehicles (i.e. one for high end, one for low end, one for SUV’s etc.) would help them out immensely. It’s the same as the Japanese model. A Camry doesn’t compete in the same market as the Lexus.

[VOA]

“
Emotionally, we may feel General Motors (nyse: GM - news - people )
represents a pillar of our economy and should be saved.
“

That can be dispelled by visiting Detroit.

Even if only virtually, at:
The Fabulous Ruins of Detroit
http://www.detroityes.com/home.htm

[VOA]

GM made substandard cars in 70s and 80s. Those days are gone.
There's nothing inherently wrong with the product coming out of GM's plants.

GM could make the worlds greatest vehicles.
And they (effectively) might not be able to give them away.

Because of all the middle-aged Americans that grew up listening to
their parents say "We're going to buy GM because it's American."
And after two or more years, heard the same parents say
"This GM peice-of-crap!!! And those GM dealer @$$holes and
vampires-posing-as-mechanics at their dealer shop!!! We'll never
buy GM again. EVER!!!"

Now those kids of the 1970s and 1980s are adults with disposable income.
Think they will even consider a GM product?
Maybe. But most of them recall their parents' experiences and
say "I ain't gonna repeat that mistake of buying a GM".

Amazing how much GM has spent on advertizing over the decades and
they totally failed in analyzing the psyche of their buyers
in the 1970 and 1980s...and that of their offspring.

Even GM can have so many "Lost Generation"s before they go belly-up.

[RayChuang88]

They have too many redundant model lines, and too much internal competition for resources. Focusing on market specific vehicles (i.e. one for high end, one for low end, one for SUV’s etc.) would help them out immensely.

I agree 100%. It would make GM a much leaner, more highly-focused company, and it means more resources will be available to develop future technologies such as fuel cells and maybe even long-range all-electric vehicles (new battery technologies now in development will finally overcome the problems that plagued the EV-1 electric vehicle).

[Don Stadt]

The demise of the American car companies is a direct result of a government that has run amok. I disagree. The economic realities in the early 80s that allowed asset-stripping and offshoring within a low regulation, low taxation framework to work in America's interest, have shifted. If done properly, government interference can help the problem. If done badly, it will make things worse. The price of telling the US Government to stay out of the marketplace altogether, is that the city slickers who got the USA into this present financial debacle in the first place (and are all walking away with their pockets full), will get even richer than they already are - while everyone else suffers the consequences. We know what sort of things they'll do: close down as many factories on American soil as they can, and get big kickbacks for doing it. Foreclose on loans, and pocket the difference. Talk down share values, and buy them at below market value. We know that's the sort of things they'll do because that's how most of them made their fortunes to start with. And in the current global marketplace, that strategy is even more lucrative now, than it was back then. Now EVERYTHING IN WALMART IS MADE IN CHINA. What happened? Stripping assets, laying off American workers, and moving production abroad. Big profits for the shareholders and market traders, cheaper costs to the consumer. Everyone wins. Well, that was the theory. Allowing market forces on their own to dictate whether businesses survive or not, is a much more risky approach today than it was twenty five years ago. We are told that the American manufacturers are in trouble because they relied on SUVs and pickup sales, when they ought to have been making small fuel efficient cars. Really? Yes, really. But not for the reasons you think. America's interest clearly won't be served if it ends up having to pay huge sums of money to potentially unfriendly nations in order to service its own supply needs. Mainland Europe has already seen its oil pipelines turned off on Putin's orders, simply because he wanted to win an argument with a former Soviet state that's now joined the European Union. So, even if global warming is a fallacy, security of supply is of major concern to Europe. We don't have to worry about that happening to America now, but as the old saying goes, prevention is better than cure. How long will it take for new wells to be drilled on American soil? For new refineries and pipelines to be built? To get them up to full production? Can America supply ALL its own fuel needs while it waits for the new sources to be at full production? If it can't, where's the oil going to come from? The Arab states? Chavez? Putin? It might cost a few million dollars more, to build cars that do 50mpg, instead of building them with engines that achieve 10mpg. But if it buys America a bit of breathing space to ensure that alternative supply routes ARE in place and ARE secure before you have to rely on foreign supplies, then it's money well spent. It is the green environmental whackos that HAVE CREATED THE SENARIO THAT WE SEE TODAY Green environmental whackos don't run Russia or Venezuela. They don't control Middle East oil supplies. They aren't responsible for taking Iraq and Afghanistan out of the supply chain. They don't tell OPEC how much to charge for a barrel of oil. And they aren't responsible for China's exponential rise in demand for oil. And, they certainly haven't set fire to any of Iraq's oil wells. So on what basis do you think they're responsible for the problem?! Green environmental whackos have misdiagnosed the problem,I have no doubt of that. But even so, they are absolutely right to warn that security of supply could be a really big problem for the United States in a couple of decades' time. Drilling more oil wells is a medium term solution. Making better use of the oil that's already available by improving engine efficiency and making use of renewable energy sources wherever possible, as the Green lobby suggest, is an alternative solution. There's no reason, other than blind dogmatism, to rule out either solution. In fact, the best strategy in my opinion is to do both.

[caver]

“It’s too bad Toyotas and Hondas are the most boring, sterile vehicles on the market.”

I’m not sure how many people agree with you, I don’t. I don’t need some sexy vehicle, I have my wife. I just want a dependable car/truck that gets from point A to point B. Frankly, I won’t pay the money for a cadillac or a Corvette. They are nice but no thanks.

[Murp]

“The demise of the American car companies is a direct result of government that has run amok”

After reading your reply, I don’t think we are in disagreement about very much. I am not against a government that sets a fair playing field for American corporations and American workers. What I am referring to is a government that has refused to allow the development of our own energy resources, thereby making us dependent upon the whims of foreign countries, encouraged offshoring of jobs, and signed so called “free trade agreements” that do not recognized the discrepency in the marginal cost of labor. They have failed to secure our borders. They have spent us into bankruptcy to the tune of 10 trillion dollars. It is the POLICIES that they have introduced that have caused our current economic crisis. In short, I believe the government has abetted the short sighted, greedy CEOs in their goals of lining their pockets at the expense of the American people.

“Everything in Walmart is made in China”

I agree with your statement and conclusion, “well that was the theory”.
The 1980s was an era that saw the greatest domestic investment in our history. “Supply side economics” brought demand and supply into equilibrium, thereby stabilizing prices and curbing inflation. I remember well the late 70s when demand far outsripped supply and consumers were rushing to buy a new car this month, (before they went up again next month). Demand-pull inflation went away. We entered a golden era with lower taxes, less government regulation, and American corporations were producing at home, for American consumers, with American labor. Our standard of living rose as the dollar strengthend and prosperity returned. But then came the demise of communism. US corporations, driven by short-sighted goals,(which ultimately has proven catastriphic), focused on NEXT QUARTERS PROFITS by replacing American workers with cheap foreign labor. And American jobs just kept on leaving. Enter the government. It became apparent that American purchasing power was being severely impacted, so in order for their ponzy scheme to work, wages had to be replaced by credit. CREDIT CARDS FOR ALL!!! Easy finance for all. After all, why worry about the loss in income when your job turned into a “service job”, paying much less, when you can get another “CREDIT CARD”. And anyway, the government told you the “New Economy” was just around the corner. Keep on spending, the debt doesn’t matter. Our money is gone. It is in China, Japan, India, and in the Sheiks bank accounts. Our manufacturing jobs are gone. Our purchasing power is gone. We face third world status. IT IS GOVERNMENT POLICIES THAT HAVE LED TO, OR ALLOWED THE DE-MANUFACTURING OF AMERICA. Old Sam Walton would be livid if he could observe what has become of us in so short a time. HIS MOTTO was WE BUY AMERICAN GOODS. Now even he couldn’t find them to buy.

“We are told American manufacturers are in trouble”

Actually I agree with you, and the Big 3 are bringing many fuel efficient cars to market. We must pursue all areas of energy development and we must cut our dependency of foreign oil. It is the Government that allowed our energy dependence on foreigners.

“Environmental Whackos”

They don’t control supply in Russia or Venezuela, BUT THEY SURE HAVE BEEN SUCCESSFUL IN AMERICA. We all want a clean environment, but these people are absolute idiots. In fact they had rather we live in the stone age. They are nothing more than a tool of those who seek to destroy capitalism. When you say they have every right to warn us about supply two decades down the road, It is “they” who have caused the supply shortage by denying development of our abundant natural resources. I give them no credit for warning us when they are the ones that caused the problem. Respecfully.