Hey General Motors, Who is John Galt?

One of the books that played a role in shaping my thinking in college was Ayn Rand’s Atlas Shrugged. It’s basic premise is that of rational self interest. Rand portrays independent achievers as ones whose achievements are interfered with by the state, and she argues that any state intervention — be it fascism, socialism or communism — is fatally flawed from the get-go.

I was always troubled by the completely unfettered freedom she espoused as a necessity, in the same way that free markets, left completely unregulated, never made sense to me. Though both are ideas which I believe we should aspire to (rather than a welfare state or other non-motivating policies).

With respect to where we are in financial markets, housing and now the automakers, if there’s not catastrophic downside to risk taking, then we might as well risk it all, every time, right?

I must admit my wife and I are really pissed off having made decisions NOT to leverage over the past several years, pay off the house, save, invest for our retirement, and position ourselves well for the future. Others I know (many others) took out huge second mortgages to take vacations or buy cars, condos, HDTV’s or boats. Some bought their McMansion with a huge jumbo mortgage, and now are under water in value, owing more on it than it’s worth and are hoping for a governmental loan restructuring.

Then you have smart, forward looking strategic leadership in firms like Schwans, who decided after the oil shocks of the 70’s to never go through that again or put their company in jeopardy. They’re looking pretty brilliant today with their propane powered trucks as I talked about in this post.

So why is it that the American car companies couldn’t make great products that get great gas mileage, and not wail to the government over CAFE standards as being oh, so restrictive to them selling gignormous guzzlers?

I haven’t purchased an American car for years since the Germans and Japanese make cars of better quality and intrinsically higher value IMHO. Argue with me all you want, but I vote with my pocketbook as do many others, making Toyota the world’s #2 automaker, for instance. So rather than being smart like a Schwans or a financially conservative gomer like me, the big three automakers acted like the world had all the oil we’ll ever need, would be cheap forever, and they made those behemoth vehicles that are destroying their companies now…

…and they want YOU AND I to bail them out!?!  Yeah, I’ve heard all the arguments about the job losses and economic ripple effects, but how could oil supplies globally, competitive vehicles and capacity issues not be obvious to a company that could afford the best strategists in the world? In my view, let ’em go bankrupt and restructure. The sky won’t fall in and maybe they’ll get hungry like Apple was when Steve Jobs came back in 1996 (just about everyone was seeing them a heartbeat away from being out of business) and figure out how to make cars people want to buy, instead of gigantic gas hogs with the fit and finish of a Yugo.

Take a look at their YouTube pitch to us about how the world will collapse if we don’t give them a loan. Mark my words, if this does go through, they’ll be whining for more by the end of 2009.

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5 Comments

  1. Chrfis Prout on November 17, 2008 at 5:34 pm

    Here’s another side to the arguments regarding Detroit automakers. Check out article for “facts” about the Big 3 especially regarding quality and fuel efficiency.

    http://www.freep.com/article/20081117/COL14/811170379



  2. Paul on November 17, 2008 at 7:32 pm

    Steve,

    I live outside the US so I guess i miss a whole lot of the social dynamic. But you can’t tell me that these Auto companies haven’t known for a while the global social trends are for greener more efficient vehicles. The fact that they haven’t reacted is an indictment on their management (and perhaps) and protectionist policies gone wrong.
    I have no doubt it will have impacts on a lot of US citizens as the propaganda states, that is sad. But putting a dinosaur onto life support is just prolonging the inevitable. IF this stupidity goes thru,YOU the tax payer should demand the action plan for how these organisations which you partially own are going to repay you your debt….



  3. Alex Morse on November 18, 2008 at 8:27 am

    The US automakers have been floundering for years. At the very best, any sort of bailout would delay their collapse. I don’t really think they can be saved without a radical change in leadership and direction. For that to happen, it’s going to require some governmental and social changes that few are comfortable with.

    The problem with totally free markets is that it expects the consumer to be informed and to act in their best interest without laziness. The average consumer is not well informed, and many of them don’t care to be. It also requires governments to not interfere with business practices. I concede that this is unrealistic especially considering the magnitude of government involvement we have had over the past 50-100 years.

    But imagine if GM was unfettered by its union constraints. GM may still have failed, or been bought out by a foreign interest entirely, but I doubt it.

    Imagine if our government had not legislated for lax laws in home loan approvals. Certainly there is malfeasance occurring on wall street, but without the mandate to give loans to those who obviously can not afford them would that first domino have fallen?

    Our largest industries are bound. We have absolutely not been living in a free market. Many of the regulations and policies leading to this mess were created with genuinely good intentions. Unfortunately, good intentions by themselves are not enough to run a country, business, or a life.



  4. Mike on November 20, 2008 at 1:13 pm

    Right on Steve. It is the equivalent of giving drugs to a drug addict and then acting surprised when they are still addicted a year later. Honda, Nissan, and Toyota have proven that Americans can build great products here in the USA. It is long past the time for Detroit to wake up and be held accountable. Everyone needs to accept that business as usual is over and that there is going to be real pain as them mess gets fixed. In my view these companies shouldn’t get a penny of OUR money until there is a viable plan in place for our auto industry, and until someone from outside of those companies is in place to make it happen. Status quo won’t cut it!



  5. Kevin on November 29, 2008 at 3:54 pm

    Steve,
    I essentially agree with you that bankruptcy and restructuring may be the only way that the domestic automakers can survive. Clearly, a blank check from the taxpayers is not going to make them viable in the long run and another “bail-out” is almost certainly going to become neccesary if Congress chooses to go that route. However, I don’t agree that fuel efficiency or quality are the overriding factors that have put them in this situation. Yes, both are contributing factors, as are many other things including labor and legacy costs, trade practice, and corporate waste.
    The current credit climate has had a destructive effect on almost every sector of industry. The auto industry has been particularly harmed because auto purchases are typically the second largest purchase(after homes) that a consumer will make in their lifetime. As credit has become less available, sales have disintigrated. Also, as the last real standard bearer for mass manufacturing, the automobile industry is much more dependent on available credit lines to continue doing daily business than any similarly sized service based industry.
    The question then becomes: Why are the domestic auto-makers in such dire straights while the foreign-based automakers have been able to avoid such problems? (At least so far!)
    Absolutely, product lines are a very large and important part of the equation. But as reported by the Detroit Free Press,:

    http://www.freep.com/article/20081117/COL14/811170379

    most of the criticisms regarding fuel efficiency and quality levied against them are exagerated at best and just plain false in many cases.
    Though many have tried, it is not disputable that GM’s claim that it offers more models that get 30 mpg than any other manufacturer is anything less than reality. The proof is there.
    So if the product lines are comparable, which they essentially are, there is definitely more to it than that.
    The trade policy argument that the UAW continues to assert is easily disputed by the simple fact that foreign automakers continue to build factories right here in the USA. Why would they do that if trade barriers where so unfairly weighted to importing? Obviously, they wouldn’t. That said, trade policy has undoubtably affected the Big 3 negatively. The influx of foreign competition is the main reason that their market share has dwindled in the last 40 years. And their own complacency and poor management has compounded it exponentially.
    The UAW is obviously not without its share of the blame. The lucrative contracts that it has won for its membership has forced the cost of doing business up and that cost has been passed along to the consumer. IMHO, the price tag of the vehicles is always the factor that matters the most to the consumer. If a similar model costs more to produce and therefore costs the consumer more to attain, the choice becomes obvious. The image of the fat lazy union worker with a fat wallet is easily one that any critic of the Big 3 harbors with disdain, no matter how accurate or misleading it may be. But, in the end, the labor costs clearly represent a big difference in the viability of the automakers. The Big 3’s labor costs are a huge drain on their competitive ability.
    Corporate culture (read: management) is another very important factor. The business model is extremely different. The complacency of the Big 3 and its inability to adapt to the competitive climate that it has found itself in are a direct result of an out-dated business approach that assumed the market would always be dominated by themselves. On the other hand, companies like Toyota have developed operation plans like the Toyota Way that have allowed them to make decisions at all levels, strategic, tactical, and operational, that put a pressure on the Big 3 that they cannot answer without changing their business model completely. They refuse to do this, and worse, they spend lots of money implementing concepts of smart manufacturing and team based operations only to abandon them time and again.
    So yes, the Big 3 have been struggling for years and the current economic crisis has brought their failures to the forefront. And yes, even if the economy would not have taken such a huge turn for the worse, they were still most likely on track to face this type of “bail-out” situation eventually anyway. Relief, whether it be in the form of a bail-out or a bridge loan, is not going to fix anything. Bankruptcy and restructuring in any common incarnation is not really an option either since suppliers would then become exposed and consumers would even further withdraw from their products.
    The idea that a few billion bucks is going to somehow allow them to recover is absurd. Realistically, the cash represents an opportunity to get them through till the new President and Congress can institute a “recovery” plan that focuses on hurting their competition through new unionization and tax laws, and not forcing change within their own ranks.
    Regardless, the domestic auto industry as we know it, is already dead. Catastrophic job losses are unavoidable at this point. The energy “crisis” was the pin that finally forced the inevitable burst of the real estate bubble and the wealth loss that the correction is causing is real. There is no easy fix for any of it. Recession is here to stay until we can get a grip on the true value of investments both tangible and intangible.
    For the Big 3, the path of least resistance for this outcome is probably going to be some type of “managed bankruptcy” that forces restructuring at all levels including labor concessions and lessens the impact of joblessness while allowing 2nd and 3rd tier suppliers to remain viable. The larger problem is still the solvency of financial institutions, without bank viability, and some measure of stability in capital markets, credit will not rebound and the economy will continue to deteriorate.
    Government intervention has played a large part in all of this, so it is ridiculous to think that they should not be a part of the recovery. The question is how and more specifically how much? A “beneficiant hand” or a social re-structuring? This is where the problem truthfully resides. I think the traditional philosophical differences between free-marketers and socialists are largely not applicable to the situation since we have already allowed the government to intervene at levels that have fostered the problems that we face. A complete withdrawal of government from the issue is as much a recipe for disaster as a complete take-over of industry.

    Too long, I know, sorry.



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