Posted by: distributorcap | November 18, 2008

The American Trabant

An automobile using the combustion engine cannot run without a distributor cap – but can General Motors, Ford or Chrysler run without the distributorcap?

For the record, I am against bailouts. Bottom line you are rewarding bad management, crummy products, and poor customer service. You are also undermining innovation and discouraging risk and creativity.

For the flip side of the record (for those who remember 45s), I just do not think we can let General Motors, Ford and/or Chrysler go into Chapter 11 bankruptcy.

And that is our quandary – we are damned if we do, and damned if we don’t.

The risk of any of these three going under, and the cascading effect it will have throughout the economy is just too frightening to think about. Like it or not, the auto industry is the foundation of manufacturing in the US, and its tentacles reach into countless sectors of the economy. Not only will affect the workers at the Big 3, but the suppliers, the service industries that depend upon the factories and employees of the car makers, the dealers, the prices of homes and real estate in the cities and towns where the plants and suppliers are located, and a whole slew of other people and businesses (including me, and not because I am necessary to make the combustion engine work – I need to work!).

Face it, no one and I mean no one, will buy a vehicle from a company that is in Chapter 11. Why would anyone risk spending $20-30,000 (or more) for a product that may not have its producer and backer behind it? It is not like buying $10 underwear or a bicycle from K mart when they operated in Chapter 11. To a strapped consumer, with so many other autos to choose from, they would just head right over to the Honda or Volkswagen dealer. The fallout would be fast and hard. GM or Ford wouldn’t have time to reorganize under Chapter 11 – you cannot retool and redesign a plant or car overnight. It is not like Fruit of the Loom making boxers instead of briefs. Under Chapter 11, the big 3 would run out of customers, cash and time well before the first desirable car hit the market.

A General Motors in Chapter 11 would ultimately mean a General Motors in Chapter 7 – liquidation.

If you think the economy is deep doo-doo now, wait till you see GM assembly line robotics, office copy machines, coffee-stained carpet and left over hood adornments start showing up on eBay. There would also be a lot of empty factories that probably would not find a second life as fancy condos. Talk about a depressed commercial real estate market. And lets not forget the possibility that a huge number of retired/unemployed car workers who are living off the legacy contracts (another huge problem) probably end up receiving some sort of government payouts – unemployment, medicaid, welfare etc.

But lets look at reality – GM, Ford and Chrysler make a lot of crappy products that no one wants. And the ones that aren’t that crappy – do not have enough demand to support the life style and cash flow that these companies need. Whether it is because of style, design, cost, expense, inefficiency, marketing, safety or a host of other reasons – the American public has given up on American cars.

Yes this sort of happened before – in 1973 and in 1980 – both times after Arab Oil embargoes. But the Big 3 came roaring back as the price of gas dropped – and the size of the cars (and profit margins) increased. But not this time – the American public won’t get fooled again – Hummers and SUVs that get 15 mpg will not be high demand again, no matter how low gas goes right now. Once people tasted $5 gas, they know it is only a matter of time before it is there again. While gasoline is back in the $2.50 range again – you do not see the crowds lining up at the Buick dealers. Only a lot of salesmen playing solitaire.

Although many do not want to admit this – the symbolic impact of the mighty US auto industry ending up in the crapper will be almost as bad as the physical liquidation that would ensue. It will be nearly a generation before we can fix the psychological devastation and public relations nightmare that will follow such an economic blow. The collapse of the Big 3 would mark the closing of era – not just of storied names like Chevrolet, Lincoln and Dodge (after all Pan Am, Gimbels, Studebaker are all gone), but in today’s global economy – it will almost most assuredly usher in the end of America as an economic power. America will have completed the transformation from a country based on manufacturing, investment and ‘making things’ to a society of services, consumption and ‘taking things.’

Empires that would rather get fat and lazy consuming and taking – as oppposed to investing and making (and tack on spending a lot of money on needless wars as the world’s policemen) cannot survive. Ask the Romans in 476 AD, ask the British after WWI.

So what do we do? If I am convinced letting the Big 3 go under is not a good idea – why would throw good money into bad companies? Didn’t I say it was nearly impossible to turn the Big 3 ship around as fast as the American consumers want them to – to build efficient, stylish and affordable vehicles that would be on a waiting list just like the Prius?

Yes I did say it would be nearly impossible – and I am afraid it will be a lot of money down a rabbit hole, with very small odds of a positive return. But the rabbit hole you know is better than the rabbit hole you do not. Chapter 7 guarantees a negative return and the likelihood of real bread lines (I am not being an alarmist – Jeffrey Sachs thinks it would be 1933 all over again). Of course any bailout would have to have a strict set of rules and oversight – unlike the crap Paulson is pulling with TARP. It would have to be a partnership of the Big 3 and the American people. Much of the management needs to go, – enough of the nepotism that pervades the upper ranks of the white collar jobs in the Big 3. Compensation would have to be tied explicitly to performance – good and successful products would actually be rewarded. The union contracts need to be rewritten and revised – the workers have to realize their free lunch (and health care) is over. They might say they will not change the contracts as leverage right now – but I would play hardball. The alternative is NO job. But in exchange they need to be given a stake in the success. The auto dealer laws need to changed. (get this – GM dealers are protected from termination by state laws – GM simply cannot just shed dealers!). Money could not be used to throw parties, but not micro-managed to count paper clips.

So should we let them fail? I have no idea.

It would be hard, long, difficult, against the grain but it would be the only way to see any success. Can you imagine witnessing a complete industry turn itself around. But seeing how our Congress and Cabinet operate – I do not have much hope in any rationale and sane program being implemented.

I think this distributor cap will stay out of the mess that is the American auto industry. Put me in a Trabant.*

*The Trabant or “Trabbie” was the infamous automobile made East Germany during the Communist era – the car was notorious for being a piece of junk. You see Trabant clubs in Europe and even in the US.

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Responses

  1. I hate SUVs and would never buy one no matter what. But I have always bought American cars even though I know that nowadays they aren’t really strictly American made. I think that those on Wall Street who were playing that commodities game didn’t help the auto makers either. Gas got so high that people had to actually buy smaller cars whether they liked it or not. IMO, Wall Street is to blame for much of our economic distress. It’s partly because of the CEO’s getting those huge bonuses, whether deserved or not, and the sneaky financing, which you have already documented in other posts. I have never trusted Wall Street–those brokers suckered the middle class in, trying to claim they will become wealthy only to turn around and take all the middle class’s assets in another bubble burst. They need to create these bubbles and sucker people in and then they bail and the bubble bursts. I see it happen again and again. When will the middle class learn that the rich are not their friends?

  2. Did you see the episode of Frontline on energy? They showed how the EPA disallowed California’s higher mileage benchmarks. The Bush Admin carries lot of responsibility, too. I think that the bailout must include caveats that require the big 3 to break free of the distributive cap. Make them be green and more efficient.

  3. I understand that when we bailed out Chrysler in the 80s, that the government eventually made money on the stock they got in exchange for the cash infusion. Don’t know if it will happen again, but I’m with you. That the auto company executives couldn’t figure out that they needed to make energy efficient cars is an outrage, but having up to 1 million people* lose their jobs and go on a limited dole? Unacceptable. *1 million includes, I’ve read, the industries that supply the auto makers. It’s not just the assembly line jobs, it’s the ripple effect that will really hurt.

  4. “Once people tasted $5 gas, they know it is only a matter of time before it is there again.”I’d be careful about underestimating the limitations of the American memory span. But I think, at this point (and unlike the price spikes of the ’70’s), they’re not going to get much time to forget. I remember the gas crises of the ’70’s quite well; as a result, I’m afraid I won’t be contributing to the resurgence of the big 3. I don’t own a car, and don’t expect I ever will again.

  5. I have no love for the auto industry – from the destruction of the electric light rail lines in most major cities in the 1950s to the dreary ugliness of urban sprawl and the nightmare of the freeway system today, I hold them at least partially responsible for many of our urban ills. I think cars are evil. They may be a necessary evil but they are evil.That said I have to think that these companies are too big to fail. They represent the last manufacturing jobs in North America and one of the few ways a high school graduate can still get into the middle class. That said again, much of the problem here lies with the huge pension and healthcare costs they have to manage. They wouldn’t be in the same mess without that crushing overhead.Toyota and Nissan recently located plants in Canada because healthcare costs are borne by the state and because the Canada Pension Plan is solvent. The U.S. really needs to find a way to shore up Social Security so that it can provide a meaningful benefit (because few Americans I know are putting enough into their 401k’s to live a middle class lifestyle once they retire) and the U.S. must consider a single payer or state funded (but not necessarily managed) healthcare system. Finally, one major reason Toyota and Nissan picked Ontario over Alabama, was ironically, because taxes and labour costs were too low in Alabama. These low taxes made the educational system so poor that the amount of ongoing training they would have had to invest to bring those workers up to their standards was more than they would have saved in taxes. Cutting taxes isn’t always good for business and it’s time to stop pandering to the electorate on this.

  6. Hi Cap;Having been in the auto business decades ago and understanding the full scope of their corporate influence I believe one or two of the big three collapsing will have major ramifications.Let’s face it, before gas went through the roof in the last year they were selling a lot of their product and still are except not to historical levels.I had a 2002 Mountaineer that I rolled over three times on I-5 between San Diego and LA on a busy Sunday afternoon and the vehicle collapsed, like it should and I walked away.Prior to that it was a decent vehicle and every thing worked.I have owned mostly Japanese vehicles over the last twenty years except for this one and I was impressed.I don’t like bail outs either, but I feel that one of those companies going down will do more damage than a Lehman or Bear Stearns to Main Street.I may be wrong, who is to know?

  7. DISTRIBUTORCAP-NY:Ford is ahead of everybody on this. It's just not Ford (Main) or Ford (River Rouge). It's Ford Motor Company (Venezuela), S.A.They figured out that high-end, low-to-no emission vehicles were the way to go but the cartel-like nature of the US auto industry couldn't have anyone LEADING on green tech or they'd all have to toss a fortune at green R & D.So, very quietyly Ford found the one place, the haven, where they could pursue any business strategy they wanted without any interference from the US auto cartel or the US government. They floated a Bolivar-GDR and a series of Bolivar Senior Notes on the BVP in Caracas. Enough to ramp up to full production in two years and sell green car cars to the Venezuelan government at a set price which will then be exchanged 1-for-1 with all high emission vehicles in service.Once pollution levels in Caracas and Maracaibo have dropped to an acceptable number, the Ford (Venezuela) fleet will hit the open market in Venezuela and for world export.Boy, that Hugo Chavez. Wotta communist!

  8. … Trabant …Spending my summers in West Germany growing up, one would occasionaly see one of these or a two-stroke Russian Lada on the street. How in hell they made it across the line back then is beyond me.

  9. Each spring, I anticipate the April release of Consumer Reports. The April edition focuses on cars and I love cars.It’s always fun to see how cars are rated and ranked by the consumers who drive them instead of the hype of the car manufacturer.The thing I’ve noticed is, how the quality of many of the cars made by the Big Three Automakers have steadily improved over the years. Yet, the perception persists that Detroit is unable to make a safe, reliable product. It is simply not true.When we finally decided to get rid of our 1994 Toyota Tercel, a splendid tiny car, it had 165,000 miles on it and we drove it into the ground. We looked at all the small SUVs and settled on the Ford Escape. The Escape wasn’t our first choice — we wanted a Toyota RAV 4 but, the Escape has a similar reliability rating to the RAV 4 but was $8,000 less. Plus, we wanted to put America first for once. The Escape is a joy. It’s small, maneuvers like a sedan, gets great mileage and is comfortable for 2 adult men to ride in and, it looks good.While I know for a fact Detroit still makes too many behemoths that get shitty mileage, they also make a number of cars that can hold their own against anything made by Toyota or Honda.

  10. i have no love for the auto makers either, but, if they are gone, and there is some kind of national emergency that results in the need for manufacturing, what would we do? what factories would be large enough to handle making tanks or whatever else might be needed? bailing them out and letting them set the terms is definitely not the answer. i think we should bail them out and keep them under the microscope. we need to know where every penny is going. they should have to invest in researching how to make affordable fuel-efficient cars.the rethugs don’t want the bailout, because they want all the manufacturing to move south, where there are no unions. that’s another reason for bailing out the big 3. i want the union to survive, even if it has to make some sacrifices.

  11. Maybe if the Big 3 switch to manufacturing Trabants. Or Yugos. kelso, you keep that up, and Chavez will be even more Hitler-y than he was yesterday!

  12. Anybody think there will be Hummer clubs in 2020? Will anyone dare keep these disgusting pieces of crap on the road for “old time’s sake”?Of course there will be. We’re Americans, GODDAMMIT!

  13. So many big questions, DCap–but what’s the answer? Thanks for explaining this on a level I could understand without using bullshit terms like “too big to fail” etc. I feel like these companies must be kept solvent, but at this point, it’s just throwing money down a well. They’re likely not going to change (or can’t), and any govt oversight is bullshit—see Paulson. I almost want one or more of them to fail, so we can test these theories about what would happen. Of course, let’s wait until it’s warmer outside so I can have my veggie garden going first….

  14. dguzman”I almost want one or more of them to fail, so we can test these theories about what would happen. Of course, let’s wait until it’s warmer outside so I can have my veggie garden going first….”Funny, I have thought the same thing myself….:)

  15. the problem started a long time ago. way back when, we opted for policies essentially not taxing the cars coming in (mostly from japan) the same way the countries like japan et al do to ours. if the playing field isnt even, the american companies will get screwed every time. and thats exactly what happened. and here’s the result. its happened in other areas as well. primarily technology. if they tax our stuff coming into their country, but we dont tax theirs accordingly, we get shafted. a one-time bailout isnt the answer. long-term responsible policies regarding fair trade is. its not that i dont advocate helping them out. we porobably need to for a whole host of reasons, many of which are cited by previous posters. but ammending current policy should be the main thrust of the policy-makers in washington. the job of a (good) government isnt to put bandages over festering wounds. its to heal them once and for all.

  16. As one who lived through both previous oil embargoes (I got my permit to drive in Nov. 1974 when gas was 33.9 cents a gallon and got my full license in December of 1974 when gas had spiked to 72 cents a gallon and then in 1981 lived through the even/odd license plate number rationing and lined up for gas with 10 or more vehicles ahead of me) I am well aware of what we could be in for again. However when Carter was President and he would counsel everyone to turn down their thermostats and embrace solar power he was knocked down as effete, as an idiot, etc. much as Obama is today. Big Oil has held the power in this country since President Warren Harding who was a pretty figurehead in place to do their bidding, much like most of the Presidents since. The alternative technology is there, has been there for decades but big oil keeps buying up the patents and burying them so their companies and methods stay profitable. When oil is no longer sustainable they will begin to produce the decades old alternatives, but if you think it will be cheaper you live in fantasyland. They hold the power, they will charge what they want.Until the greediest among us care about the world we leave our children and grandchildren not much will change. People! Get a grip! You can enjoy it while you are here but you cannot take it with you no matter what you believe. If you are a believer Jesus said that a wealthy man would have a harder time making it to heaven than a camel could fit through the eye of a needle and if you are a non-believer you will be dead a worm food or burned as ashes so why are you denying the rest of the population a decent survival?With all of their faults to their credit the robber barons of the industrial age knew that if their workers enjoyed a modest income and could afford to purchase goods, travel and entertainment that would make the barons even wealthier. All of the modern free marketers have not thought far enough ahead to realize that once the majority populace has been beaten far enough down that they no longer can afford to purchase goods there is no more trickle up to their pockets unless Bush, Cheney, Paulson and company steal it for them. If that all grinds to a halt what will our wingnut welfare cases and free market cheerleaders do?

  17. I'm with you, thinking the bailout concept is not a good place to go. Paulson is an idiot & has changed directions with this plan more than the Winds off the Pacific Ocean.There are a few details I'd like to explore though.For instance GM has a lucrative war profits contract supplying the military with Humvees for almost 6 years now. How is it they are broke?GM made an experimental electric car called the EV1. It was only leased, and it was wildly popular- people wanted to buy those cars @ end of the lease.I suspect big oil did not want electric cars stepping down their profits and GM took these cars to the wrecking yard. So if/when they whine about not being able to retool, develop the new technology, I say Bullshit.They literally have already been there & done it. Ford gave out bonuses to the upper eschelon to the tune of 6 or 7 times their 2 million dollar salaries, as recently as 2007.If you were able to do a full aduit that inculded all perks, you would find the big 3 suffer from the same ill- they are top heavy with overpaid management, gave out generous bonus$ and perks, and they made their focus only on bowing down to the almighty shareholders, where profit is king- sacrificing quality to squeeze more profit.US cars may hold up well in their early years, but do not have the lifespan of the foreign cars. But many did not hold up well…. Ford's SUV had fatal flaws, and Ford's Focus held the dubious record of the most recalled car ever. My first reaction was why should they get a bailout?But a further discussion made me realize they are the only US car manufacturing industries in the whole country. We lose them & we lose an entire industry. The other part is I don't want the worker bees- those who spent a lifetime working for these companies to have their pensions, healthcare disappear. I don't want the corporations to be able to walk away so easy. Don't be fooled, these carmakers have worldwide operations. But as I was typing, they said dealers business is down by 2/3rds. The piece closed saying the $25 billion could be infused and gone by spring. Here is the $25 billion dollar question…..Does the fact we have a major recession going on, impact the economy in such a way that no matter how much the auto industry retools, reinvents, etc… people who are losing jobs, losing 401K retirement money in the tanking market, foreclosing homes,are not going to buy new vehicles regardless of what the big 3 does?

  18. FranI think you hit it dead on. GM is burning through $1 billion a month and only has $2 billion left. How long would $25 billion last for the Big 3? It would take over a year to retool even to produce eco cars and who’s going to buy them with unemployment going up?If we don’t get the rest of the economy going all of this is a waste of time. I’d rather see most of this bail out go to infrastructure and renewable energy. I’ve been out for nearly a year now, the worse I’ve seen it in nearly thirty years and this is only the start. I was smart. I started preparing for this ten years ago but I know I’m the exception. Remember when you see gas at under $2 a gallon it’s a sign of the economy as in no demand. Once the economy gets going again it will be back up and remember that there is a limited supply. Maybe we should just take the $25 billion and give it to a company that makes electrics and gas electrics. I know Tesla motors sure could use the capital.

  19. I live in an urban neighborhood by choice, about three miles from downtown San Antonio.All I see in the neighborhood are 1995-2005 Americans cars in various stages of decay; dented, paint fading, etc.When the Big Three can start making cars that last more than 5 years without showing so much wear and losing value so rapidly, then they can be bailed out.I say no to the bailout. Use the funds instead to retrain laid off auto workers to work to the standards of Toyota and Honda, then lease the retooled Big Three plants to them for a song.

  20. It is the $64 question and the comments above sure gets a person thinking and the answer is not clear.After reading Fran’s, Demeur’s and KarenZipDrive’s comments I would be inclined to go against the bailout as it appears to be an excersize in futility.Best use the money to keep the employees fed and sheltered till this crisis passes.

  21. I was conceived in the back of a Trabant. I never said anything before because I really don’t like to talk about it…

  22. Stop by and pick up your early Christmas present DC.

  23. let ’em fail. let’s drive this country into the ground and build it back up even stronger. no more quick fixes and band aids. we need a hatchet not a scalpel. a daisy cutter not a surgical strike. a bailout wouldn’t be any good if the underlying causes weren’t addressed, such as the constraining labor unions and the inferior product being churned out by the Big 3. we can’t compete with Japan as it stands now. throwing money at the problem will only prolong their demise. it will be a slow death as opposed to a quick one. cancer as opposed to a massive heart attack while shoveling snow. we’re going to go through some rough times, no doubt. but life isn’t always easy. and the government is there to solve all your problems. we need to take some ownership of our failings and the solutions to them. next topic.

  24. Ooops! typo~ I wroteIf you were able to do a full aduit should have been* full AUDIT.*As for this whole bailout BS- I have come to this conclusion:Release the forensic accounting hounds I think there is a whole lot of illegal stuff going on making these bailouts necessary- especially on Wall Street, but I bet the Big 3 have some gross mismanagement of funds going on as well. It seems the bailout recipients or wanna-be-recipients are unfamiliar with the concept of tightening their belts, hunkering down, learning how to pull themselves up by the bootstraps, run lean & mean. My example: AIG's spendy rewards at a luxury resort post bailout #1. Their excuse: It's industry standard.My response:It's not industry standard to take Government bailout money. Unless or until the bailout money is repaid, all perks and bonus money are prohibited. Furthermore… no bailout company CEO or top level official can make more than government officials. The president makes $400,000 a year. I bet that bailout line would clear out pretty darned quick. Here is a peek at Ford 2007 stats:– Alan Mulally, Ford president and chief executive officer, earned$2,000,000 in salary and received incentive bonus awards of $7 million.Total 2007 compensation was $21,670,674, which includes salary,bonuses, the Company-recognized expense for stock options and otherstock-based awards, as well as all other compensation.– Don Leclair, Ford executive vice president and chief financial officer,earned $1,005,633 in salary and received incentive bonus awards of $3million. His 2007 compensation totaled $11,703,127.– Mark Fields, Ford executive vice president and president, The Americas,earned $1,255,634 in salary and received incentive bonus awards of$2,850,000. His 2007 compensation totaled $8,389,898.– Lewis Booth, Ford executive vice president, Ford of Europe and PremierAutomotive Group, earned $868,133 in salary and received incentivebonus awards of $2,250,000. His 2007 compensation totaled $10,264,463.– Mike Bannister, Ford executive vice president and CEO, Ford MotorCredit Company earned $708,700 in salary and received incentive bonusawards of $2,150,000. His 2007 compensationJust sayin' for the record I NEVER got 7 times my annual salary in bonus money, but I can only guess this kind of over the top money distribution happens for all the Big 3, and even moreso on Wall Street.

  25. Executive compensation in America is clearly out of control and I simply shake my head in disbelief at the CEO salaries of many of the companies who helped orchestrate the $700 billion dollar Wall Street bailout.(NOTE: None are part of the Big Three Automakers.)- Lehman Brothers Inc. Chairman and Chief Executive Richard Fuld received compensation valued at $22.1 million in 2007. Fuld realized about $40.3 million in 2007 from exercising stock options and $26.5 million from vesting stock awards.- Goldman Sachs Group Inc.’s Lloyd Blankfein, the highest-paid CEO among the investment banks, received a $68.5 million pay package.- AIG’s CEO Martin Sullivan earned $14 million dollars in 2007 but his 2008 termination or severence pay upon his firing as AIG CEO was $47 million dollars (two years pay)

  26. i was going to answer each of you – but i decided to know another post on this……..

  27. I’m curious DCap. Do you think other car manufacturers like Toyota will fill the gap left by GM, Ford and Chrysler should they go under? After all, many of these “foreign” car companies manufacture the cars their American market cars here in the States.

  28. Geez I don’t know about this question, Dcap! This is a toughie! I mean on one hand you have the workers (whose Union wages are being blamed for the Big 3’s failings by the far right!) and then I wonder about throwing $ at them, without doing the changes needed for going more environmentally sound, etc. Great discussion!!

  29. Excellent site I will be visiting often.


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