I don't know about you, but I could only pick my mouth up off the floor when I watched the Big Three's CEOs beg for a taxpayer-funded bailout this week. Never mind the fact that they're now asking for $34 billion (up 36% from $25 billion two weeks ago), or that they drove to DC in a caravan of new hybrids that would make the Keystone Cops proud.
What got my attention was that Ford's CEO Alan Mulally who, after admitting "big mistakes," attempted to sway Congressional members by saying "we're really focused now."
Perhaps I'm not the brightest bulb in the bunch here, but it seems to me that's what the Big Three said in the 70s when Japanese cars invaded in earnest; that's what they said in the 80s when quality suffered; and that's what they pitched in the 90s with SUVs and trucks. Yet their market share has dropped from more than 70% to less than 50% today.
They're so "focused" I can't stand it. And I can only wonder what they'll say when Chinese automakers hit our shores in the next few years at retail prices that are 30% less than Detroit's production costs?
Even at $1 a year, these guys are overpaid in my book – but I digress.
The so-called Big Three are nowhere near the anchor of American industry that Detroit would have us believe. And the arguments they're using are superficial at best. Maybe that's good enough to bamboozle some people, but I like to think the American public is smarter than that.
Essentially what they're saying boils down to this…that the Big Three – GM, Ford, and Chrysler – contribute billions of dollars to the purchasing chain. Allowing them to go out of business would disrupt this chain, and somehow affect 3 million jobs.
It might, but chances are, not for the reasons they've laid out.
The Big Three are manufacturers. They do not exist to purchase things. They exist to make and sell them. And their success or failure is based uniquely on how well they meet the needs of consumers who buy their products which, of course, leads directly to how much market share they have. Or not.
It's Elementary Economics, Dear Automakers
That brings up the notion of basic supply and demand. If you recall high school Economics 101, supply is the total amount of goods and services (in this case cars) available for purchase. Demand is the amount of a particular good or services that a consumer or consumers will want to purchase at a given price.
Demand curves are normally downward sloping because consumers typically buy less as price gets higher. Similarly, supply curves are upward sloping because there is typically less consumption at higher prices, which means more supply remains unpurchased.
In their rush to portray their industry as the lynchpin to supply as well as the victim of foul economic conditions, they're forgetting that their failure will not bring about the total destruction of demand. History is literally littered with failed companies. Demand will no more fall off because the Big Three fail than people will stop buying beer if Budweiser goes under.
What's far more likely to happen is that Honda, Toyota, Tata, Mercedes, BMW, Chery, Geely and other companies will fill the void. Chances are that not only will these companies absorb key elements of the purchasing chain, but the workers, too. History shows that industry consolidation is actually a positive influence for the remaining companies and their workers. History also demonstrates that during periods of industry consolidation there really isn't anything other than short-term loss in business activity. Other firms will move in… if there's demand.
Bottom line, what Detroit's really after is a bailout that will preserve the status quo and implicitly reward 40 years of inept management, bad decisions and poor quality. It simply doesn't make sense to throw $34 billion at businesses that are losing $6 billion a month.
Like the other Federal bailouts (which I, as a proponent of the Austrian school of economics and free markets, think are fundamentally wrong), a taxpayer-funded bailout would do nothing to increase Detroit's competitive position. Instead, a funded bailout would serve as a sort of punitive tax on successful companies like Toyota and Honda, just to name two of the most obvious. It would also allow Detroit to come back for more money after they blow through anything given to them now.
There are still plenty of strong automobile companies operating in the US making a slew of products ranging from ultra-plain utilitarian models to large-scale trucks and all sorts of luxury vehicles in between. And more will probably come here if they fail.
So here's to the natural order of things and, hopefully, a levelheaded Congress that will let the markets take their natural course and force a shakeout…not a bailout.
Have a great weekend!
Keith
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About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.
What you say is true. To me, it is all hypocrisy. The Fat Cats of wall street get hand outs from the government and what do the failing small businesses get? loans or nothing. It is really sad. My father is a physician and owns his own practice. His clinic is in a lower income neighborhood and when this financial crisis started, it was not long before he started seeing less and less patients. It has been that way for months now for him, but in the name of the free market he gets nothing. Sure the Big 3 provide more jobs but the reason they are failing is because they are not meeting the needs of consumers like they should. GM for example cannibalized its fully electric car (the EV-1) for obvious reasons. The truth is that some parts of the American economy is long overdue to have its teeth pulled, and this is one of them
How can we bailout the big three when we did nothing for the airline industry, the steel industry and the furniture industry and the textile industry. The people who worked at those companies have survived. What makes these poor managers any different? Take them through bankruptcy and then reorganize as the process calls for.
I think that it is not the right timing to do politics for the republican in delaying the bailout for the automakers.
But anyway, goodluck to all of you, CDS blow-up is finally here.
AGREED!
It IS bull that "the big 3" will cause a ripple in the industry. I agree that foreign cars will take their place. Right now they want to throw a bunch of stock-market percentages around in some lame effort to prove the global economy depends on the U.S. but foreign exports are waiting with baited breath to move in and don't doubt it!
I agree with Zela, why should the big guys be rewarded for failure when it's not acceptable from the small guys? It's time the "fat cats" understand starvation rations like the REAL WORLD. We're not the richest country in the world – the Republicans saw to that with their tactics of taxing the poor to keep the rich wealthy.
Besides they have the Italian, Chinese and Russian mafias to pay off. That takes big money. They also have to afford the free handouts of every foreigner that comes in. There are people who cannot speak english shopping in Neiman Marcus, a store I can only afford to walk by. And I do mean walk.
A portugese family came here with nothing and left millionaires because while the mother was on welfare the father owned a bank. My mother didn't qualify for welfare because I made $9/hr and according to them that's too much money. We had sometimes less than $20 a week for food. I'm roughly $10,000 in debt. I lost my job almost 2 years ago by the way and have still not found another, even retail won't hire me.
As an American I know what my countries priorities are – not Americans.
So what's wrong with the American economy? Well let's review the statistics of where American money goes shall we?
No, I'm not prejudiced, I just would like to know which of their countries is going to make a millionaire out of me just for showing up!
Back to the conversation at hand:
FORD is known for it's bad transmissions, it's a sales gimick. Their transmissions are basically set to crumble around 100,000 miles. Accidental I'm sure!
While these manufacturers are charging between $20,000 and $70,000 per vehicle, where is it going exactly?
Bottom line is WHEN these companies go under, no one will miss them, least of all foreign car companies.
My point all along is GOOD OL' AMERICA, MAKING AMERICA THE POOREST COUNTRY IN THE WORLD. My own country has poor management, of course they want to invest in failure.
I have spoken.
Great Idea guys, let American companies die and allow foriegn companies to move in and fill the void. Tell that to people in Flint MI, about Toyota and Honda willing and ready to bring back the Jobs and infrastucture that GM took with it a couple of decades back when it left Flint (after all Flint survived right?). Tell it to all the small midwest town that died at the end of the "industrial revolution" when factories closed. A slow economy affects demand, it kills it go to Flint MI and other places like it and see how many new car dealerships are there. That's not how America works, America is wealthy because it knows how to balance cpapitalism and social responsibility. Remember, telling government to step aside is why we are in the financial crunch we are in now. Yeah the market will correct itself, but at what cost, the difference between some third world countries with a ton of natural resources and us is that we have a government that works. You've all made valid points, but really consider the consequenses of your suggestions, I take it none of you live in MI or in any of the towns that will be desimated if these companies go under. Perhaps consider writing your editorial with these people in mind.
Hey Jazzcat, you think it's bad now, wait till the big three go under and I move to your town with a college degree to compete with you for your $9/hr job you already lost.
What's making America poor, its you, people like you that complain about social reforms-and throw out the baby with the bath water"-Lets end the welfare state? Oh yeah! Regan already did that.. You can thank Nixon for the value of the dollar (he changed it from money to currency don't know the difference? pickup a book). BTW, Republican don't tax and give to the rich, they borrow from china and give to the rich. That's another reason the dollar is falling, Thank our "beloved" Regan for that (Our biggest borrower before Bush jr. out borrowed all of them combined), and some Americans still thinks he was a great president… an actor with great economic policies, that's an oxymoron if I ever heard one.
You all need to quit complaining about things you don't fully understand, stop shooting yourselves in the foot with those complaints because they eventually turn in to issues that elect politicians. Don't bitch about paying taxes then maybe the money that you do keep will have some value. Don't bitch about saving big companies and then complain about not having a job.
If we all listened to Keith, we can have all manufacturing go to leaner and meaner foriegn companies, because they can get away with near slave labour (and oh yeah, screw the unions too, because they allow hardworking Americans to make "to much money").
When the last of the manufacturing jobs are gone, we can all fight over the service industry jobs that are left, jobs like cashier at wallmart or an employee at google. which one do you think you're going to get?
Well ONO, we are just commoners, what do we really know about any of it???!!!
The American Government knows what it's doing – OBVIOUSLY, that must be why we're in a Depression. Ya know it's funny – a Republican was in office the last time our country was in a Depression. I'm surprised Congress isn't allowing Bush to GIVE AWAY more FREE MONEY to people who will not be able to fix the economy. For one thing it's just not enough, it's like putting a band-aid on a shotgun wound.
The Big Three are in over their heads and have been for quite some time. The name of the game in business is to PLAN. It reverts back to poor management, plain and simple. Where were the Boards of Directors when these companies were starting to slip? There isn't simply one or two people to blame here. They didn't worry about it because they knew that if worse came to worse they'd have government bailouts to fall back on.
If you ask me they need this much required wake up call to put a forceful eye-opener up their rears.
This country is in real trouble when the "fat cats" won't even help each other.
You're an idiot. I agree with comment #5. People like you wonder why our economy is so bad when youre out buying imports.
the reason these companies are being given bailout money is to keep american manufacturers and workers competing with all of the foreign manufacturers so stop complaining and being so cynical… our government doesnt always want to screw us over