Don't Bail GM Out

Please understand that what I am about to say pains me greatly.

I have always been a proponent of American made cars - specifically GM, I don't have any particular affinity for Ford or Chrysler (though each produces or has produced vehicles of merit in specific instances). From the time I was born my parents drove GM vehicles - with 2 exceptions (a 1996 Jeep Cherokee and a 1974 AMC Jeep CJ-5). My parents both drive GM vehicles to this day (dad drives a 3/4-Ton GMC truck - Z71, Duramax; mom drives a Grand Prix GXP).

My first, second, and third vehicles (not counting my days driving the previously mentioned 1974 Jeep) were all made by GM (all were/are Pontiacs - '96 Grand Prix GTP, '01 Trans Am WS-6, '02 Firehawk Trans Am). My current dream car is made by GM - 2009 Z06 Corvette. When I watch NASCAR, you'll notice my favorite drivers all drive GM products (in as much as any NSCS car is really a product of a manufacturer).

I give you all of those details that no one cares about except me so that when I say what I'm about to say you'll understand the internal dissonance it creates.

In recent days talks of a GM and Chrysler merger have been all over business news. These discussions don't particularly excite me, but whatever. In the last couple of days news has surfaced that these two manufacturers are seeking billions in government bailouts in order to merge and survive. Now I'm mad.

In general I'm against government bailouts anyway. But this one is going to really irritate me because it is doomed to failure from the word go. Why?

Becuase neither of these companies (alone or together) is capable of being profitable. Yes, you read that right. In their current form, with their current business model, and accounting for their current business environment neither is going to survive. Why?

Two reasons:

1. The sheer dollar value of what they owe in retirement benefits to current and future retirees cannot be supported by firms of their current size. It's the same issue as Social Security is facing...sort of. Back in the good old days for GM they had a lot more workers than retirees, so meeting demands for retirement benefits wasn't a problem. But time and competition have forced work force cuts so there are now far fewer paying into the system than drawing out. And, geniuses that they are, they didn't fund the plan sufficiently back when those people were working to have the money available later.

2. Unions. GM's (as well as the other automakers) work force is largely unionized and has been for years. And those workers enjoy great wages and benefits that almost no one else in the US gets (their medical coverage while working and in retirement is second to none). The unions contributed to the under-funding issue I described above by continually demanding more, but pose an even greater threat going forward. The union contracts in place now make it difficult or impossible for GM (or Chrysler or Ford) to effectively make needed changes to production, close plants, etc. in order to adapt to the current situation and changes in demand. In some cases, when jobs are cut, workers are still paid because of their union contracts. Add to all that, the cost of this unionized labor force makes it impossible for GM to make money on the cars it sells in many cases. That's right, it's actually possible to buy a new GM vehicle and if you know what you're doing pay less than the real cost to produce that vehicle. That's a business model problem if I ever saw one.

The US government needs to let GM (and the other automakers) fail, fold, file for bankruptcy, pick your own term here. Reason?

That's the only way to break the unions. And sadly, breaking the unions is the only way an American automaker can ever truly be a profitable enterprise again.

As I stated previously, I'm generally against bailouts, but at least with most financial services firms, if done correctly and making the big assumption they are managed properly, they have a viable business model. The US automakers do not.

The next sector that is going to go begging to the government is going to be the airlines. Lower oil prices may help them for a short time, but lower demand is ultimately going to drive them to the brink. When they start asking for a bailout the government's answer needs to be "no". They have the same problems as the automakers - at least on the union front, I'm less familiar with how their retirement program funding is doing.

In the interest of full disclosure, my wife is a member of MSTA, which is a teacher's union. I'm not in favor of that organization or the borderline coercive practices used to get her to join. She is a member for one reason - the insurance they provide in the event she were to be sued for some reason. Well, that and it gets her in to most road games for free.

Additionally, I want to be clear my comments above are strictly from my perspective and are not intended to assess the emotional or personal toll that what I'm suggesting might have on those who might lose their jobs. Those are real issues that I don't intend to gloss over, but it is my opinion that propping up a business that isn't viable is going to cost more than helping meet the needs of those families displaced by the loss of their job in the short-term while they find a new job.

Final thought: I don't want GM to fail. I just don't see anyway that it can be a viable business longterm without a major restructuring effort that can only take place on the other side of a bankruptcy, etc.