Automakers and the U.S. Government: more investment, less aid

Shame on you GM; thank you GM
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General Motors will not go down. I write this because GM is a linchpin in a “domino effect” that does not just take down GM’s suppliers. If GM fails, then it will not only stop the trickle of customers in its showrooms, but in all in U.S. brand showrooms as well. Because if GM can fail, the already low consumer confidence in the smaller U.S. companies would fall further, possibly triggering the bankruptcies of Chrysler and Ford (which are already a possibility without help from GM.)

So the current debate over if the government should bail out the automotive industry is pointless. The government will lend a large hand to the car industry because of how much would be lost if it doesn’t. Just because General Motors, Ford and Chrysler are third to approach the feeding trough (behind AIG and the banking industry,) doesn’t mean the government shouldn’t fill it with slop.

But a regular loan isn’t the answer. Consumer confidence doesn’t just come from interesting cars. It’s also a product of knowing that the car company that sold the vehicle today will be in business tomorrow. You’re not likely to buy a DVD player out of the trunk of a Buick, so why would you buy a Buick out of the trunk of the U.S. Government.

The government can’t just hand out cash. It needs to somewhat stand behind these cars. The aid can’t be just loans, but an actual investment in the U.S. auto companies.

The U.S. Government needs to get into the car business. If the government is going to provide aid to the Big Three, then it should tax the first part of the aid so that it can buy twenty-five percent of the automakers shares on the open market. As of the 11/14 closing prices, this would amount to a about a $460 million investment in General Motors and a $1.07 billion investment in Ford.

So, if GM wanted $10 billion from the government, the loan would be made out for $9.54 billion. $460 million would be diverted from the aid package and put to directly purchase General Motors stock. Although GM would not receive this cash, the upshot would be an instant increase in the stock price because of the increased buying and the government backing.

Terms of the twenty-five percent ownership would be that the government would hold the shares for no less than five years. This would provide for a true backing of the industry that would help to insure consumer confidence. While the products are improving, the consumer would also know that the cars are not just backed by GM or Ford, but Uncle Sam as well.

Chrysler is slightly tougher because it’s privately owned. If its parent company Cerberus wants the federal aid, than it would still have to give up twenty-five percent, leaving Cerberus with a still-majority fifty-five percent. But Cerberus would have to go further. For transparency, the only way a private company like this could be eligible for federal funds is if it would have to prepare annual financial statements and be publicly audited, just like a public company. Also there would have to be a new clause on Chrysler that would make sure that it could only be sold to a U.S. company during the next ten years or when all loans are paid off, whichever comes second. This way Chrysler may be a private company, but it would insure American aid helps American workers.

That’s right, I’m suggesting government intervention/ownership. But before anyone thinks this is communism at its finest, it’s a little more like mercantilism. In other words, using the government to strengthen the national state. It’s a more guarded form of capitalism that may be needed in a time where there are obvious economic blunders.

This would not be the first time a capitalist government took over its auto industry. England and France both did it, but with two very different results.

Britain nationalized the troubled British Leyland in 1975. Once under government control, budgets were scrutinized by the bean counters. Programs were canceled, and products went stale. There was never a recovery, and the all companies under the British Leyland name eventually ended up dead or under foreign control.

France took control of Renault in 1944. Renault was not actually in as much financial trouble; this was more in response to Louis Renault possible collaboration with the Nazis during World War II. Renault has thrived under national backing because it governmental leash wasn’t as tight. It did have to be reigned back in the early 80s because of over investing in non-core assets. Eventually the French Government waited until it was a profitable time, and released Renault back onto the open marker in 1996. Although Renault is considered a privatized company, the French Government still owns fifteen percent of Renault today.

We don’t have to go as far as either one of those European examples. I’m suggesting a limited government investment into a company as opposed to a full nationalization. The idea here is to learn the lessons from the past by having the government keep its hands off the ideas for future car design.

Instead the U.S. Government plays the role of the protector. If other markets recover before the United States, then a weak auto industry without any government ownership is ripe for the takeover. GM’s entire outstanding shares are valued at $1.84 billion as of 11/14. If a limping General Motors does not have a big guardian, a mid-sized foreign company looking for a pet project could easily swallow it.

After the five years of ownership, and the economy recovers, the government can choose a financially opportunistic time to release the shares it owns on the open market. This means that not only will the car companies be saved, but also the government may be able to make a little money in the process.

Who draws the line on what companies and industries get this kind of aid from the government? I don’t know. I’m not an economist; I’m a car guy. This is just how I see a real long-term strategy for weathering possibly the U.S. auto industry’s toughest storm.

What do you think?
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3 comments:

  (3) posted on 11.18.2008

Ok, let’s see the numbers. 25 billion dollars. Alright, that is some BS.
So you are telling me that a car manufacturer with that many accountants can do business with that many digits off the book!?!
They could abandon the ship, and take their golden parachutes. But this time, when they land, they should land in jail.

Myles_Kornblatt  (169) posted on 11.17.2008

I am usually a big fan of laissez-faire in big business. In most cases I don’t believe in government intervention, but I am a car guy first and a businessman second.

I don’t like the idea of just handing out money. That’s why my suggestion is to have the government also take a percentage of the company. So that when the U.S. auto industry recovers (and I truly believe it will,) the government will get some real money back for coming to the rescue. That’s something that doesn’t happen on a low-interest loan against company assets.

As pointed out earlier this is not communism and more like mercantilism. This is good for the state. Because if GM goes under, then there will be multiple hundreds of thousands of people out of work who will now need to draw money from the government. When General Motors is talking about bankruptcy it may not be talking about Chapter 11 (reorganization); it may be talking about Chapter 7 (liquidation). The government is going to have to pay either way, but at least with government investment, we get to keep our car companies.

No one else will currently take on the large burden that is GM. No company is big enough to swallow GM as a whole. If General Motors goes bankrupt, a few foreign brands will be sold off as a whole, like Opel to Europe and Buick to China, but most domestic brands will become shells. Names like Chevy or Cadillac may find homes as rebadged versions of foreign cars, but most General Motors dealers and factories in North America will close.

The ripple for this was covered earlier. There will absolutely be a domino effect from any domestic automakers bankruptcy because the American public follows publicity. In the 70s and early 80s publicity about how American cars were inferior to Japanese ones dealt a blow to the industry. Americans began to think that American cars were junk and didn’t look at domestics again. While in many cases this was, it was not the case the whole time. There was a real problem with cars like the Datsun B210 rusting while still in the showroom, but people bought them over ALL domestics because of perception.

Also the government can’t take a controlling interest in auto companies, because it will be a disaster that will kill off any cars with soul. One of the biggest problems in the government-controlled British Leyland is that the company had to get approval for it new car lines from the British Government. This meant everything went a typical governmental pace (laborious) and rarely were purse strings loosened so that an exciting car could get through.

There does need to be fresh blood in the executive ranks for a full organization, but that is a topic all on its own. Let’s hope the auto industries make it that far to where we can have that discussion.

Myles_Kornblatt  (3) posted on 11.17.2008

I don’t know how a communistic ideology has fallen in a discussion of business matter, or of finance.
This topic is a financial problem of a car manufacturer, or domestic one. So what? There are more than one domestic car manufacturer. Let it close. GM has been pursuing a profit mentality instead of designing cars for its own country. Like what? Like safety, efficiency, and etc... That’s how other car manufacturers have caught the market.
There’s no domino effects if GM just get bankrupt. There will be buyers. Just get rid of those management people from GM from getting more money out of the office, and put them on the streets, and let the union people show them a lesson.

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