The three major US automakers are now asking for an economic bailout. Unlike the airline industry which has declared bankruptcy in the past, automakers face a larger backlash from consumers as the stigma of bankruptcy can cause massive lose of confidence in support, maintenance and warranties of the products. Foreign automakers, although suffering from the current economic conditions, are still staying afloat in a world which GM, Ford and Chrysler did not prepare for.
During AIG’s bailout, a congressional hearing put AIG executives on the hot seat for being in economic turmoil yet still finding the capital to host a week long conference in southern California where they spent $200,000 for hotel rooms, almost $150,000 for catered banquets, $23,000 at the hotel spa and $1,400 at the hotel salon1. GM stands in the same boat with their executives flying to DC in their corporate jets at a cost of approximately $15,000 per flight to ask congress to fund their failing industry2.
With gas prices starting to hit the ceiling of what consumers are willing to pay, demand for smaller more fuel efficient cars has risen as well as demand for alternative fully electric and hybrid vehicles. In March 2008, the total amount of miles traveled in the US dropped by 4.3%; the first drop in number of miles driven since the early 80’s3. Even though gas prices have dropped considerably during the past few weeks, the vehicle and lifestyle changes made by many Americans is less likely to change.
The small Silicon valley startup Tesla Motors gave hope of restoring viable electric cars with their all electric sports roadster. However even they have hit hard times with a recent layoff cutting over half of the companies staff4. GM, Toyota and others gave up on electric vehicles (EVs) in the early part of this decade in what still remains a controversial move5. Now GM hopes to reenter the electric market in 2010 with its Chevy Volt. Even with falling gas prices, the emphasis GM and Ford put onto their lines of large trucks and SUVs has cost them significantly. Electric and hybrid vehicles may be too little and too late. Now the big US auto makers are asking the government for a bailout, similar to the package given to the banking industry earlier this fall.
Meanwhile Toyota, BMW, Honda and Volkswagen, although they are by no means immune to the economic downturn, are still keeping above water. These companies have domestic factories and, although they are held by foreign owners, contribute significantly to the American market. The argument that the loss of GM, Ford and Chrysler would bring massive job loss to all the intermediate jobs in the US that depend on these large companies, such as parts manufacturing and sales dealerships, is ridiculous. After all there are other auto makers, and these small companies must adapt to new customers in order to stay viable.
The idea that the auto industry names are too relevant; that they would damage the American psyche if they were to disappear is just as irrelevant an argument. Does anyone remember RCA? What about Zenith? The American industry for consumer grade entertainment electronics is a fraction of what it use to be. Years ago Panasonic and Sony took a market that had been dominated by US industry by offering a higher quality product for a lower price.
If a business can not innovate and prepare for a new era, then that company must be allowed to fail in order to allow for new and innovative ideas to flourish. Propping up massively inefficient companies who have made poor business decisions, such as major investment banks and auto manufactures, will only lead to a stifling of potential new small business, startups and innovators.
Yes there will be economic hardship and turmoil as people shift jobs and are reorganized, but out of such a mess there is the potential for growth. People with massive amounts of stockpiled invested assets may lose those savings, but they’ll see it trickle down into a new economy that is more sustainable. Those without much money may be on a more even playing field. There is no need to redistribute wealth by means of taxes and government mandates when, if allowed to, the market can do so on its own.
Taken to the extreme the government must be prepared to do something if absolutely necessary. President Hoover was ambivalent to he plight of the American people during the great depression believing that market forces would eventually right everything. But we are in a dramatically different time and we are nowhere near the depravity of the great depression. However if we continue to prop up bad debt, inefficient industry and the various other old rotting branches on a tree that is otherwise healthy at its core, those branches: that bad industry, will eventually collapse the economy under its own weight and take most of the middle class with it.
1 Flogging of AIG Execs American News Project. October 7, 2008.
2 Auto execs fly private jets to beg for $25B bailout Puzzanghera and Simon. Chicago Tribune. November 20, 2008.
3 Traffic Volume Trends US Department of Transportation. March 2008.
4 Credit Crunch Slowing Electric Cars Kestenbaum. NPR. November 3, 2008.
5 Who Killed the Electric Car (Film 2006)