The End of the Big 3?

July 25, 2008 6:11 AM

Will the government allow Ford and GM to fail?

I know that there's no real answer to that question until it happens, but it seems more and more likely that at some point, the government will either have to actively bail out with a cash infusion at least one of the big automakers, or they will have to actively stand by and let one of them (most likely - Ford) implode. Ford's recent announcement of over $8 billion in losses in the last quarter alone does little to strike confidence in car buyers, investors, and manufacturers. Is it in the government's interest to have the Big 3 around anymore, or does it not particularly care one way or the other? Once upon a time they were bellweathers of the economy and a symbol of American dominance - I feel that that is no longer the case. It would be something to see a company like Ford have a fire sale and shut down its plants.

I find the decline of American automaking fascinating, and am personally hoping for a resurgence of quality and profitability, and a rise in efficiency, from American carmakers.

This question is a bit chatty, yes, but I'm also looking for specific or expert info here - what is the precedent for letting a company of this stature fail? Is it possible? Is it imminent? Would GM and Ford merge? What is the future American automaking?

posted by billysumday to travel & transportation (27 answers total)

Wouldn't it just be more likely that one of the foreign car manufacturers would wind up buying them?
posted by JaredSeth at 6:23 AM on July 25, 2008

Actually, I've heard that there's already been feelers put out by the American companies, especially to Chinese automakers, and that the American companies are so poorly constructed and mismanaged that foreign manufacturers frankly aren't interested. Also, they wouldn't really be "American" companies if, say, Toyota purchased them. I'm sure there'd be some sort of right-wing jingoistic buy-American brouhaha that would try to prevent such a takeover.
posted by billysumday at 6:26 AM on July 25, 2008

I'm sure there'd be some sort of right-wing jingoistic buy-American brouhaha that would try to prevent such a takeover.

You would think, but it didn't matter for Budweiser, and it doesn't get more American than that.
posted by smackfu at 6:41 AM on July 25, 2008

Just trying to keep it light.
posted by billysumday at 6:44 AM on July 25, 2008

Your questions is kind of vague. Depends on what you mean by "fail". Chapter 11?

For Toyota to buy GM they would have to purchase enough stock to control the board of directors. Why would they do that? It's probably cheaper to chip away at market share until there is nothing much left?

Pretty much anyone, anywhere can own stock in GM or Ford. Although, Ford is still pretty solidly in the hands of the family (if I recall correctly) because of how they have arranged voting rights on different stock classes.

Chrysler is private and therefore could be "sold" in the sense you are probably thinking of, but GM and Ford probably not. Ownership of large corps is a very complicated thing.
posted by dzot at 6:45 AM on July 25, 2008

What Big 3? Chrysler already got taken over by the Germans, sucked dry and then dropped. Doesn't some corp called Cerberus own it now? Clearly this means Chrysler has already passed through the gates of Hell. Mind you, Chrysler had already received a massive bail out, the benefit of which got passed straight to Daimler Benz, as far as I can see. The US had better not bail the remaining two losers out now.
posted by BinGregory at 6:52 AM on July 25, 2008

I wouldn't imagine anyone would want to "buy" the company (acquire a controlling position in their stock) if that would mean taking over their union contracts and obligations.

The US automakers have assets -- factories, tooling, designs, brand names -- worth lots of money, so I don't doubt that Toyota or another automaker would snap those up if they had a chance, but I doubt they're worth taking over the company for. Better to wait and snap them up in liquidation, and avoid taking over all the labor contracts and old pension obligations that you'd get if you took the company as a whole.

What I suspect the Federal government will probably end up bailing out, if that were to happen, would be those pensions. I suspect that somehow, in some indirect way, taxpayers would end up holding the bag there.
posted by Kadin2048 at 6:53 AM on July 25, 2008

Is it the right-wing thing? I was just trying to make a reference to what we've seen before. We saw it with the Dubai ports thing. Saw it somewhat with Budweiser. I just think it would be an issue if Toyota or Honda tried to buy Ford.
posted by billysumday at 7:01 AM on July 25, 2008

You might be on to something there billysumday. Americans were willing to let the DaimlerChrysler fiasco happen because that's a Euro company; it doesn't hurt the pride the same way. That's the only explanation because the idea that it was a merger rather than a takeover was absurd. I think you're right that people would just not accept an Asian takeover.
posted by BinGregory at 7:05 AM on July 25, 2008

Its the pensions, the health insurance and all that debt obligation. Now, I never thought to see the level of bail out of private firms like Bear Stearns but this seems to be the time of individual reward and community punishment. So, I actually think that the govt. will handle their pensions and other crapload; do a showy "drop dead" to one of the automakers to show that the gov'mint has some testicular fortitude (Potemkin village style) and then let them reorganize free of all the burdens acquired earlier. This leaves the tax payer and general public screwed but hey, look at the execs at Countrywide...founding a company to handle mismanaged mortgages. My husband, the economist, has yet to convince me that corporate executives get punished for failure and if someone can explain how they do that is meaningful beyond, "poor bastard, had to sell his yacht.", I am all ears. Wow, I have had a lot of coffee today.
posted by jadepearl at 7:10 AM on July 25, 2008 [1 favorite]

What I suspect the Federal government will probably end up bailing out, if that were to happen, would be those pensions. I suspect that somehow, in some indirect way, taxpayers would end up holding the bag there.

This has already come up with airline pensions. In that case, the pension funds were insured, but there was doubt as to whether the corporation insuring those pensions could actually handle a large scale default.
posted by mkb at 7:12 AM on July 25, 2008

Well, it happened once (Chrysler bailout), so there's no reason it couldn't happen again. IMO, (as someone who's dealt with a PT cruiser for the last 5 years) Chrysler is the diametrical opposite of a "a resurgence of quality and profitability, and a rise in efficiency", but we could always hope for GM and Ford.
posted by Orb2069 at 7:20 AM on July 25, 2008

Dunno that Ford and GM need bailouts. Last I checked, Ford and GM were posting profits... just not in their US operations. Or at worst, reasonable losses. Anyway, Ford and GM are far larger than just their US branches.

It's also the case that their path to profitability in the US is actually pretty clear -- stop refusing to sell Euro models, which don't suck ass, in the US. Their management is just too fucking dumb, or too perversely incented, to do the hugely fucking obvious.
posted by ROU_Xenophobe at 7:36 AM on July 25, 2008 [1 favorite]

I'd recommend reading the GM Death Watch, Ford Death Watch, and Chrysler Suicide Watch sections on thetruthaboutcars.com. They really have it in for GM; they certainly seem to be the most diseased of the companies management-wise.
posted by zsazsa at 8:01 AM on July 25, 2008 [1 favorite]

Chrysler already got taken over by the Germans, sucked dry and then dropped.

Where's the evidence that Chrysler got "sucked dry"?

CNN.com May 14, 2007:

"The German automaker then known as Daimler-Benz paid $37 billion for the U.S. automaker in 1998, but it soon found itself weighed down by uncompetitive labor costs and lost sales to nimbler Japanese rivals."

(...) what is the precedent for letting a company of this stature fail? Is it possible? Is it imminent? Would GM and Ford merge?

British Leyland might be a relevant precedent. BL (later known as the Rover Group and the MG Rover Group) was created in 1968 by merging several British automakers. The company got government aid, but lost money and market share for years, until the demise of the company was inevitable. High cost, low quality and unattractive cars killed them - but that took almost 40 years.
posted by iviken at 8:07 AM on July 25, 2008

Not an expert, but I don't think it'll happen purely because these companies are so widely reviled. Michigan has been a critical swing state in every Presidential election I can remember, and the Big Three have been spiraling downhill for decades, so some candidate would have taken a flyer on this kind of idea at some point if it wasn't complete political poison for them to do so.

Government, even in Michigan, has had an adversarial relationship with the Big Three for decades... kinda like Big Oil, but without the benefit of bestest friends in the highest places. Even here, the topic of a potential Big Three shutdown will typically provoke a "good riddance" response from anyone who isn't directly tied to these companies... and most folks I know who are tied to them have seen so many people they care about hurt (fired, downsized, pension/healthcare slashed, etc.) by the Big Three that they now quietly share that opinion, and openly assume they are next. The further away from Detroit you get, the lower the opinions get.

Bear Stearns might have provoked more outrage had it not been believably sold as a action to maintain national economic stability... but when the Big Three's turn comes around, nobody will buy it being a national issue. At that point, expect the nation to say "screw Detroit" and make a buyout unthinkable -- followed by years of heartwarming news stories about small southern towns who lost their Big Three factories, only to have them saved by their overseas friends like Toyota.
posted by Pufferish at 8:22 AM on July 25, 2008 [1 favorite]

There is still a huge market for automobiles. The companies are in trouble because their business model doesn't work anymore. There's still going to be someone in their position, in the future -- whether it's the "same" company depends on how you reckon it.
posted by winston at 8:33 AM on July 25, 2008

BinGregory writes "Chrysler had already received a massive bail out, the benefit of which got passed straight to Daimler Benz, as far as I can see."

First off the so called bail out didn't actually cost the American public anything (Chrysler paid back the loans with interest and early to boot meaning the goverment didn't have to), kept millions working and gave us the minivan. An excellent out come that one could only hope to achieve in Ford or GMs case and a model of good goverment.

Second Daimler lost money on the "merger", they hardly sucked Chrysler dry. If anything the suckage was the other direction.

GM and Ford would probably be fine if they could dump retiree benefits. Doesn't Chapter 11 bankruptcy give them that out without killing the company? If so that is what is going to happen eventually.
posted by Mitheral at 8:35 AM on July 25, 2008 [1 favorite]

Daimler lost a TON of money on the merger.

I think some sort of bailout will happen. Somehow the government will fund all the stupid UAW benefits.

The big 3 really need a reboot to get away from the UAW mess that they're stuck in. Hopefully when they emerge, union-less, they can better copy the Toyota and Honda model.
posted by unexpected at 9:08 AM on July 25, 2008

but this seems to be the time of individual reward and community punishment.

Otherwise known as privatize the profits, socialize the losses.
posted by spicynuts at 9:17 AM on July 25, 2008 [2 favorites]

There is an article in The Atlantic (I am pretty sure) about a month ago about GM is actually the company with the most ambititious schedule for a plug in hybrid, and considering how much money they are making overseas (a black Buick is THE car to have in China to show that you have made it), I would not be tremendously concerned for them.
posted by BobbyDigital at 9:56 AM on July 25, 2008

BobbyDigital writes "GM is actually the company with the most ambititious schedule for a plug in hybrid"

The Volt. It's a car that, if it meets it's goals, is needed and could save GM's butt in the same way the K car saved Chrysler. I really hope the current cash flow problem doesn't derail it.
posted by Mitheral at 10:03 AM on July 25, 2008

I think things are looking pretty good for US automakers right now. Their balance sheets are terrible - GM took a $68 billion quarterly writedown a couple quarters ago, and I don't care what you call an accounting change, $68B is $68B - but they have a number of tailwinds.

The unions are gutted shells of their former selves; for example, the recent American Axle strike caused GM not to make 100,000 trucks that they would never have sold anyway, so management was happy to let that drag on and on. The new employment and benefits packages are very favorable to the companies.

GM recently announced it was going to stop paying health care costs of Medicare-eligible retirees, which is bad for Medicare but it's going to save them billions of dollars per year.

The dollar having dropped 60% of its value against other currencies in the last 5 years makes American manufacturing and labor competitive for the first time in a couple decades; GM is showing double-digit growth in its outside-US operations.

If you look at Chrysler, it's no longer owned by Daimler; buying Chrysler with these cheapened dollars was attractive to Cerberus Capital Management, a private-equity firm. Something similar might happen to GM or Ford - viz. Kirk Kerkorian - but it might not, the companies might be able to recover on their own. They've done it before many times - read Peter Lynch's "Beating the Street" for his cynical take on these cyclical industries. Just when you are reading about blood in the streets, massive layoffs, bonds degraded to junk, future of the companies at stake is when they tend to turn around and take off.

Finally, go test drive the cars. They're pretty nice for the money. The economy is lousy right now but when it picks up, GM is making cars people want to drive at a good price.

Full disc: I'm long GM.
posted by ikkyu2 at 10:26 AM on July 25, 2008 [2 favorites]

Also, they wouldn't really be "American" companies if, say, Toyota purchased them. It really wouldn't matter, except to only the most jingoists, if it somehow protected the company from failure and helped preserve jobs and a large portion of the economy.


Chrysler is private and therefore could be "sold" in the sense you are probably thinking of, but GM and Ford probably not. Ownership of large corps is a very complicated thing. No, it happens all the time. Just google up "tender offer."

Mitheral and ikkyu2 have summed it up nicely. Predictions of GM and Ford's deaths seem a bit premature, but even if that were to occur it is different than when Chrysler was in trouble. The auto industry is less important to the overall economy than it was back then. Rescuing Chrysler not only rescued the company and a lot of jobs, but also protected the economy from a very large hit. The current economy I think could sustain the loss of a Ford, or even GM, more easily than the seventies economy could have sustained the loss of Chrysler.
posted by caddis at 11:33 AM on July 25, 2008

Finally, go test drive the cars. They're pretty nice for the money. The economy is lousy right now but when it picks up, GM is making cars people want to drive at a good price.

Are they nice enough that people are willing to take the gas cost hit resulting from shitting MPG? Cuz at some point these cars could give you a hand job with every turn signal but if they are going to get 15 MPG with gas at 5/6 dollars a gallon are people still going to buy them?
posted by spicynuts at 1:17 PM on July 25, 2008

It's not the brand that makes them 15 MPG, it's the type of car. The Tundra, one of Toyota's 4WD pickups gets 13/17 MPG, the same as a Ford F150 4WD.
posted by smackfu at 3:42 PM on July 25, 2008

spicynuts: GM unveils new fuel-sipping Camaro. You've not been paying attention. These companies, like their cars, can stop on a dime and turn around.
posted by ikkyu2 at 11:35 AM on July 26, 2008