? asked in Cars & TransportationBuying & Selling · 10 years ago

Should U.S. automakers be allowed to go under?

The September sales figures for automakers operating in the U.S. came out yesterday, you can read about them at http://money.cnn.com/2007/10/02/news/companies/aut...

Ford, in particular, took a big hit in profits. All of the former Big 3 makers had disappointing results, and there doesn't seem to be much hope on the horizon. Will market forces eventually sink the Big 3, and should the U.S. Government step in, like they did with Chrysler in 1980?

I, for one, would hate to see all of those jobs go away - but have these companies acted in the best interests of the American people? After all, did not U.S. makers, GM in particular, lead the fight to sink California's electric vehicle law? Aren't their most profitable vehicles - gas-guzzling, Mega-SUVs - helping to keep us dependent on Middle East oil? Aren't they dragging their feet on hybrid technology? Is this socially responsible? When do we pull the plug?

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  • Anonymous
    10 years ago
    Favorite Answer

    Turning a profit, at least as the car companies compute it, is not actually all there is to a company. There's a statistic that GM loses $1,400 or so for every car that it builds, due primarily to its obligations to various retirement funds.

    Believe it or not, that's actually a reason to keep it open, not to shut them down. The company doesn't have to be profitable to have a reason to exist. The company has obligations to fulfill, and even if the shareholders all decided to sell their shares and drove the share price to zero, the company should still exist for the purpose of paying off those retirement funds.

    It's an obligation the shareholders assumed when they bought the shares. If they didn't do the research and paid too much, it's their fault.

    If the share price went to $0, nobody would buy it, since it has debts. But one set of people would buy it, despite the debts: the retirees to whom it owes debts. They would continue operating the plant, effectively paying themselves and not caring that it's not turning a profit.

    In other words, the company can't go away as long as it can sell cars for more than it costs in raw materials and labor, which doesn't include paying off its debt. The accounting is kind of complicated, but it means that if the big automakers are angling for a government bail-out just on the basis of jobs... forget it. It's the shareholders who lose, not the employees, when the price of the stock drops.

    If the company can't actually turn a profit on those cars using real (not Detroit) accounting... then we have a conundrum. I'd mostly like to say, "If you can't make a profit, you lose. Sell off the things you can (including the plants), and pay off the debts first. The shareholders get stuck with the bill."

    That's economics, but it's not good policy, at least not in that version. The jobs are actually reason to keep the company around if it can possibly be turned profitable, but for an analysis of those numbers I don't trust the Big 3's own accountants. There are too many ways to hide money when you're angling for a bail-out (like pretending that your old obligations are current costs).

    I'd really like to call up Toyota and Honda and see if they'd like a few manufacturing plants in downtown Detroit. They make better cars. They'd pay the employees, and the proceeds from the sales would go into doing the only thing that the companies know how to do: pay off dumb promises that they made to the unions in the 70s and 80s.

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  • Anonymous
    10 years ago

    1. Did you expect big profits while we are in a recession? You do realize that "cash for clunkers" was basically a once in a lifetime deal, right? Don't expect that kind of boost every year when consumers aren't exactly becoming more creditworthy as the days fly by.

    2. Since when should auto manufacturing jobs be the backbone of our economy? If you want that to work, you are praying that every buyer makes 60-84 months of payments religiously. Pretty stupid to base an economy on that alone.

    3. The Chevy Cruse will sell for $17,000 while its basic clone with batteries, the Volt, will sell for over $40,000. Now do you get why the automakers do not want to be forced into that racket?

    4. We can solve that problem of our oil coming mainly from Canada and Mexico. Drill in our own lands for oil. Besides, gas is cheap and all those westerner white folks that are working on the Arab oilfields reap the rewards from what little Arab oil we make use of.

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  • 10 years ago

    There is a basic rule of economics (supply and demand) that says an industry that returns high profits generates more supply. Such was the auto industry. This same rule means that when there is an excess of demand, the prices should drop yielding lower profits and weeding out the weaker suppliers or those of inferior goods. GM tried to deny the reality of this rule and continued to provide inferior goods at inflated prices, which resulted in lost sales.

    The problem is not the UAW, but the management and stock holders who wanted continued rates of return in a saturated market. The cost cutting methods used resulted in higher overhead and reduction is customer. Because instead of maintaining a labor intensive manufacturing methods, they went capital intensive (robots). These higher fixed costs still but into profits, there were fewer employees (who could not afford to buy the cars they were making) and many lost sales because robots do not buy cars.

    To answer the question (as I could lecture hours on the subject), if we were in a free market world, yes. But in reality we are not, and the US can not afford to loose the employment base that generates the money that keeps us secure.

    As a foot note: The US auto makers spend more on advertising then they do on labor. Most of the employees on the payroll are paper shufflers. The solution to the problem is to get rid of the non productive employees that are college graduates that do nothing but write memo's to each other and collect pay checks. These employees earn twice as much as those in the shop and have a support staff that is also fixed over head. Such as a person who selects colors, and gives them names who gets paid 150000 dollars a year, has a support staff of three people.

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  • 10 years ago

    Ford is actually very profitable now. The only reason its profits are not big at the moment is because it is paying back the billions of dollars in loans it has. GM and Chrysler are not doing as well as Ford though.

    I think it would have be a bad idea to let the big three go under because the effects of the massive amounts of jobs lost would have cost the country more than bailing them out.

    My only problem with the bailout was Chrysler. Chrysler makes terrible cars and they didnt have any plans for improvement in the future I do not agree with the US bailing them out. Lucky for them Fiat bought them and is saving them (sort of).

    Ford has a fairly fuel efficient offering in their fleet. They have even priced the Lincoln MKZ hybrid the same as the gasoline powered version.

    The US automakers are on their way out of the mess.

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  • 10 years ago

    I personally see them as no different than the mom and pop pizza shop in any town in the USA. If mom and pop do not run their business responsibly then they suffer the consequences of closing the doors. I think the same should apply to any company no matter the size. Just because GM and Ford are huge companies should not give them any preferential treatment. Their executives have languished in huge salaries and extreme bonuses for so many years, they don't know how to run a company any more. All they know how to do is to make the numbers show well enough so they get their bonus. It is quite sickening.

    I think they should fail like any other business. Perhaps another company would buy them and run the business more responsibly.

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  • 10 years ago

    In my opinion, if you can't run a profitable business, then you don't stay in business. The US companies have built lesser quality cars since the 1970's and you shouldn't be rescued for running your business poorly. GM,Ford and Chrysler would still be putting out the garbage they did in the late 70's and 80's if it wasn't for Honda and Toyota building much,much,much better cars at the same time. It forced the US automakers to build better cars.

    Even the latest bailouts didn't teach the US guys anything. The head of GM (I forget his name) at the time stated that "He felt that GM was hurt by a reputation of building lesser quality cars, but that in reality, their cars were just as good as the Japanese cars"

    ANY mechanic that has worked on cars for any amount of time will tell you that the US cars aren't as good as the Japanese.

    Let them all go under, the US population is still going to buy cars, so all of the surviving automakers will have to hire people for the increase in demand for their cars. The jobs wont be completely lost, just moved to a better company.

    Source(s): ASE tech 25 years
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  • 3 years ago

    Hybrids would desire to have an battery that provides countless thousand (4 or 5) money to the cost, is heavy and makes use of up lots of the trunk area, and final I checked had to get replaced each seven years, They get 50 miles a gallon whilst in comparison with 35 for a small vehicle with the comparable wearing ability. this would be an prolonged way of asserting that the marketplace for hybrids is extremely small. The hybrids that are on the industry are in general SUV's the place the mileage on the prevalent equivalent is extremely low.

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  • 10 years ago

    Having said that, however, I do take exception to your assumptions that the US auto industry is responsible for many of our problems. If nobody was buying SUV's, big pickup trucks and large cars, they wouldn't be selling them. And remember that Toyota and Nissan are also in the same markets. And what about motor home makers? Are we going to blame them too or are we going to take responsibility for our own collective actions and blame ourselves for basing our lives and goals around consumption?

    I think it's time to stop putting full blame on a marketplace that simply responds to customer wants/needs and start looking inward.

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  • Anonymous
    10 years ago

    For multiple reasons:

    1) If they can not compete, they should change their business model; quit building gas hogs.

    2) Unions and workers need to get a clue, and the wages for working on an assembly line should be about minimum wage; cut the costs of building a car, and they can compete.

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  • 10 years ago

    This question is about 2 years too late.

    And why is everyone responding like this is 2008?

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