How Not to Succeed in Business

minute-man-2-lithoThere may not be a Ford in your future, but there is definitely a bankruptcy in Ford’s future.  Detroit Automakers have been on Capital Hill this week making their case for another $25 billion loan from the government to tide them over during the current downturn in the economy.  The danger for the industry is that they may get it.  If they do they will not be allowed to make the adjustments necessary in order to survive.

For now, the proposed loan is on hold.  The CEOs did not help their case when they showed up on Capital Hill after having arrived in their private jets at a cost of tens of thousands of dollars each, asking for a handout from the taxpayers.  To register Congresses’ displeasure, Speaker Pelosi postponed any vote on the bailout until the second week in December.  The Automakers have been told to return on December 2 — presumably without their jets — with a business plan showing how the loan would insure their viability and exactly how they plan to spend the money.

They would be well advised to heed the caution “be careful what you ask for, you may get it“.  A loan from Washington to the Detroit automakers at this point would ensure their ultimate failure for a number of reasons.  The first $25 billion already given to the industry require them to use the money to retool their manufacturing facilities in order to produce more environmentally friendly cars.  The additional loan would have even more strings attached.  Congress would get an equity interest in the companies and an agreement allowing for more government oversight of the industry.

If we learned nothing else from the financial collapse, we should have learned the ineptitude of Congress when it comes to managing business affairs.  Unfortunately, the goal of too many in Congress is not a healthy auto industry, but rather a manufacturing industry controlled by a socialist/democrat Congress.

Most Americans are not aware that there are two different auto industries in the United States.  There are the domestic brands headquartered in Detroit and the foreign brands manufactured in other parts of the country, mostly in the south.  While the foreign brands have been forced to cut back production due to lack of demand they are in no way near collapse.  The disparity between the two is in production cost.

The Big Three automakers are saddled with billions of dollars in overhead that the foreign owned companies do not have.  Much of this overhead is made up of “legacy costs” consisting of pensions, health care cost for retirees, and pay for non-producing employees negotiated by the United Auto Workers over the past several decades.  This additional labor cost makes the Detroit automakers non-competitive in the auto markets in which Congress wants to force them to compete.

The bigger luxury cars and sport utility vehicles made by the Big Three and popular with the driving public have a high profit margin allowing them to compete successfully with their foreign competitors.  Companies are successful only when they sell a product that meets the consumers perceived needs at a price they are willing to pay.  There may be a need for small fuel-efficient cars as far as Washington is concerned, but there is little evidence that enough of the American people feel that need to produce the profits Detroit automakers need to survive.  Until they do, there is no way Washington can force them to buy them.

If the government is successful in forcing Detroit to produce small cars the public does not want, and in addition, they are forced to operate under the direction of the federal government they will only continue to lose market share and worsen their financial position.  The only solution is for them to restructure the companies under the protection of bankruptcy court and shed some of the unsustainable overhead they now carry.

Even then, unless they are allowed to produce products the public needs and is willing to buy it is only a matter of time until they are back in the same place they are now.  It is just plain stupid to believe the same Congressional incompetents that managed Fannie Mae and Freddie Mac into insolvency will somehow cure the ills of the auto industry.


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