David Cole is the man whose industry and union-funded Center for Automotive Research carried-out a study of the economic implications of Detroit’s meltdown. The result has become the de facto standard for “this is the serious shit that will happen if we don’t bailout Motown’s mismanagers with federal tax money” argument. So much so that the mainstream media uses the figures without attribution. TTAC has exposed Cole’s blantant self-interest in this matter. Our Best and Brightest have examined CAR’s study and exposed its deep methodological flaws. While there is no doubt that a GM, Ford and/or Chrysler bankruptcy filing would create an economic catastrophe for tens of thousands of workers and hundreds of communities, exaggerating the impact for political gain is deeply immoral. And just plain wrong. Giving Cole an uncontested platform to promulgate his propaganda is, if anything, worse. And yet that’s exactly what The Detroit News has done…
The DetN is so happy to let Cole mislead the general public that the headline AND strapline say the same damn thing: “Letting automaker fail costs more than price of loan automaker” is immediately followed by “fail costs more than price of loan.” You know, just in case you can’t be bothered to read Cole’s dietribe [sic]. Which begins by blaming the same government his people seek to suckle.
“The popular complaint is that the domestic auto industry got itself into this mess, and it should suffer the consequences. But the reality is the Detroit Three wouldn’t have cash flow problems if the federal government hadn’t caused the financial crisis, in part, by ensuring that Americans who couldn’t afford a home suddenly could buy one. The resulting subprime mortgage crisis helped lead to the credit crunch, which has caused a dramatic decline in auto sales.”
The meme is clear: the financial crisis is the cause of Detroit’s disaster. The fact that all the other automakers doing business in the United States who aren’t HQ’ed in Motown are in no danger of going belly-up is, apparently, irrelevant. The inconvenient truth that GM’s former captive finance unit GMAC is up to its eyeballs in the subprime mess doesn’t get a look in. Or the American automakers’ obvious willingness to lend money to car buyers whose credit scores mirror a minor league baseball player’s batting average. But wait! There’s more! More federal complicity in Detroit’s dilemma!
“The federal government also contributed to the auto industry’s problems with its lack of a realistic energy policy. The price of this hit home this summer, when the price of gasoline spiked to $4 a gallon and caused a massive shift in the types of vehicles consumers would buy. Now that the price of gas is below $2 in some areas of the country, there will be far less demand in the short run for the fuel-efficient vehicles that the government wants the automakers to sell in greater quantities.”
How fucked-up can one argument be? Seriously, I’m sitting here at the keyboard, schnauzer at my side, lost in the maze of Cole’s rhetorical obfuscation. Are the feds to blame for not having an energy policy that kept gas prices low? Or for having one that did, then didn’t, then did? Did the federal Corporate Average Fuel Economy regs force automakers to make the fuel-efficient cars that would have saved their ass if they’d hadn’t gorged on SUV and pickup truck profits (assuming they could make competitive small cars if they really wanted to) a good idea then, but wrong now? Or wrong then AND now?
Cole’s willingness to blame CAFE for Motown’s misery shows where his sympathies lie– if such evidence were needed. It also shows that Motown’s propagandist-in-chief is no strategist. Criticizing the Dems’ legislative darling child will not win Detroit any friends in Washington. No siree Bob.
“If GM, Ford and Chrysler had to shut their doors, according to our center’s calculations, the economy would lose nearly 3 million jobs in the first year. That is because the auto industry has the highest jobs spinoff of any manufacturing enterprise. For example, for every auto assembly factory job, there are another eight to 10 jobs outside of the plant.”
This rhetorical technique is called reductio ad absurdum. You make a claim, show how it leads to an absurd or ridiculous outcome, and then conclude that the original claim must have been wrong– as it led to an absurd or ridiculous result. If Detroit’s automakers file for Chapter 11, there is no way on God’s green earth that they will simply shutter their doors and be done with it; they will continue making and selling vehicles. It may be a fraction of previous production, but it will not be zero. To suggest so is the dictionary definition of disingenuous. Of course, Cole’s got that one covered.
“Critics have said it would be better to let the automakers file for bankruptcy and get their financial houses in order. The problem with this approach is that industry experts know that consumers won’t buy expensive products from a bankrupt company. That still leads to serious decline in sales and to 2 million lost jobs very quickly.”
Don’t you hate it when an industry expert quotes unnamed industry experts to prove that he, an industry expert, is right? Perhaps Mr. Cole should conduct a study on consumer attitudes towards buying from a bankrupt GM, Ford and or (yeah right) Chrysler, focusing on price. Because at some price, ANYTHING will sell. And he might want to ask “If the your car warranty was backed by the federal government…” Nope. Checks cashed. Blinkers on. Two million jobs? Where’s the data? And define “very quickly.” Fuzzy logic uber alles.
“In addition, the very low level of current sales and surprisingly low inventory of vehicles are creating a pent-up demand for new vehicles once the credit crunch subsides and the economy improves. The market promises to shift from the buyers’ market of the past decade to a sellers’ market where fewer financial incentives or discounts will be needed to sell a vehicle with the industry’s reduced manufacturing capacity.”
Baseless conjecture. Dataless drivel. Crap. In fact, you could say that the domestic automakers’ build ’em fast, pile ’em high, sell ’em cheap strategy over the last ten years created an automotive “bubble.” That burst. TTAC may not be a credible source of industry expertise in Mr. Cole’s eyes, but we called the sales meltdown (sub 12m units). And plenty of us hereabout don’t see a recovery until the tail end of 2010. And even then, vicious competition from the transplants guarantees that America will ALWAYS be a buyer’s market.
“…the government needs to give the Detroit Three a bridge to this brighter future. A bridge loan now would be far less expensive than letting one or more of the domestic automakers fail.”
Or not. In fact, funding the automakers without letting them pass through Chapter 11 would be a bridge to nowhere. And a complete waste of money. Our money.
So to TTAC I rushed this morning after reading an article in the Washington Post about bankruptcy(!) options for GM. The article was fine but the thing I wanted to cite was an estimate for the $$value of a GM collapse. Except, it was probably spoken by the same loon that uttered those crazy ideas above. FTFA:
“A failure at GM, which represents about half of the U.S. auto industry, could eliminate 2.5 million jobs and $125 billion in personal income in the first year, according to a report published last week by the Center for Automotive Research. In three years, the government’s tax loss could total more than $108.1 billion.”
http://www.washingtonpost.com/wp-dyn/content/article/2008/11/11/AR2008111103075.html?hpid=topnews
So, we’re only talking about decrease of a cool $100B in tax revenues…OFF WITH THEIR HEADS! Without a massive restructuring GM is not worth saving. Not at only $100B.
PS: I really really think GM should file C11. I don’t want GM to go away. Its just in such bad shape now that C11 is the only medicine. From the looks of it the idea seems to be catching some momentum in Washington.
“…the Detroit Three wouldn’t have cash flow problems if the federal government hadn’t caused the financial crisis, in part, by ensuring that Americans who couldn’t afford a home suddenly could buy one. The resulting subprime mortgage crisis helped lead to the credit crunch, which has caused a dramatic decline in auto sales.”
Hmmm… I’ve heard this type of logic before… my kids use it all the time.
“Dad, it’s your fault we were fighting. You grounded us and sent us to our room. If you hadn’t grounded us we wouldn’t have been stuck in the same room and wouldn’t have been fighting!”
Sometimes amusing; sometimes frustrating coming from kids.
Not so funny coming from very serious adults about very serious issues.
He’s the spawn of one of the execs from a bygone time when the De(b)t3 were the only game in town. His loyalties are to who pays him, where he would go out of business if they went chapter 11/7. Don’t expect anything close to the truth from him. Hell, even the union folks think he’s full of shit.
Chapter 11 would kill GM’s chances. This isn’t like Chrysler in the 1980’s. Customers would not risk their second largest investment to a car company in bankruptcy. Period. Car buyers have far too many choices today to plunk down money at GM in bankruptcy.
A U.S. loan that buys GM two or three years is a more likely scenario. Management change is needed NOW.
Even with C11, who would give them money to reorganize? (besides pandering lawmakers)
Fun exercise of the day;
http://www.bls.gov/data/inflation_calculator.htm
inflation adjusted GM stock value;
last time it was at $2.76 – 1946
2008 adjusted value -$0.22
This guy is pretty much a tool of detroit. He warns everyone of the pain, but the pain will still come. There is way too much capacity in detoit and there will have to be massive layoffs to adjust the capacity to what? a 10M american market. This will require massive layoffs and alot of pain. Unless Nancy Pelosi is willing to bribe detroit with bailout funds to keep these UAW members on the payroll. Let’s hope at least that they don’t keep turning out cars that americans don’t seem to want. And of course the dead beat buyers can’t quality for buying the detroit models, so can Nancy force lenders to finance these dead beats?? The more you look at all the ‘lifesaving’ that will be required by the feds, can the US afford this spending orgy???
Given the news coverage over the past week, wouldn’t you think it’s already common knowledge among potential car buyers that GM is in a heap of trouble? If anything, Chapter 11 would be a good sign to consumers because it at least indicates that there’s a plan for them to get their you-know-what back together. Or maybe they should institute a “Creditor Discount for Everyone” sale … you pay what we pay!
Scenario 2 in the CAR report is “50% Reduction in Detroit 3 Operations”
Um, hasn’t that already happened over the last 10-15 years????
I know the white collar numbers for GM have gone from ~80K in 2000 to around 30K today, and the blue collar numbers are probably roughly the same percentrage decrease.
Has this caused the economy (well, outside of the midwest) to collapse?
And this doesn’t all of the sudden happen all at once – way too simplistic of an assumption – other companies pick up the slack. yes, there is some pain and some percentage of the workers take a while to find new jobs…these are the assumptions that should be analyzed.
There is no ‘analysis’ here of how all these things would occur – they simply take big numbers (employment) and multiply by other big numbers (income) – doesn’t take PhDs to use Excel like that….
Too bad his logic was not applied to other industries or companies. Nor to individuals, we are responsible for our own bills and can’t ask for a bailout.
We are talking about billions here people. Not few grand but 10s of thousands per US resident with interest for decades.
Robert:
I wouldn’t get too wigged out about Cole. He makes his living off of everything related to the Detroit Three and being Ed Cole’s son he’s got “GM-itis”. I had dinner with him in Livonia back in 1992 and he’s really not a bad guy.
Everyone, who knows anything about the U.S. auto industry knows how the chowder-heads in Detroit, Dearborn & Auburn Hills got into this current pickle, it’s another manifestation of what’s been brewing for a long time; it just looks fatal this time.
I don’t think too many who are in a decision making capability take “Dr.” Cole too seriously; he’s just trying to figure out what he’s going to do for his next trick.
Cole is a long-time hack who seems to feed on media attention. Very predictable. Not worth paying much attention but, but the MSM tend to do so anyway.
At least the idea of bankruptcy is now widely discussed in the press. . . .
We need split-offs of TTAC like TTAA (agriculture), TTAE (energy), etc. to examine the BS put out to get and sustain ongoing subsidies and favorable tax treatment of business sectors across the board. The immediate economics of the vehicle companies and the fact that there is real competition just brings this segment into sharp view now.
This bailout is starting to make me feel ill. The amount of money involved to save the unsavable is nauseating. I hate the most that they are taking out tax dollars and future tax dollars to keep them in business then we still have to go out and pay for their sh*t cars on the open market.
If I’m going to get screwed over by these unproductive assholes I would rather get something out of it. The government should do the bailout the other way rather then give them money to just waste. Take $50 billion and just buy the excess product from them and start giving it to Americans. Hear me out here:
Some quick math gave me an estimated figure of about 2 million units the government could buy for that $50 billion, if use figure on purchasing their lower priced product all the way up to $50,000. Anything that costs more than that people should be paying for. If the government pays MSRP on all those cars and trucks the manufacturers will see profit from all those sales and it will help their financial situation.
The government could collect taxes for the cars they give away, maybe an amortized gift tax, something special for this bailout that wouldn’t kill tax revenues but still be affordable for the poor person getting the car. The cars and trucks would be doled out based on need, family size, ability to pay taxes, etc. And a small percentage would be just given in a lottery to make it fair since their are tons of SUV’s to get rid of.
This wouldn’t save the Big 2.5 in the long run since there is just too much capacity in this country but it would at least give us something for our money while helping them at the same time.
Wasting my fingers typing it though since the government looks intent on listening to the crap spewed by the likes of Cole and the MSM is great at just taking what they say for granted.
American Leyland here we come!
“the reality is the Detroit Three wouldn’t have cash flow problems if the federal government hadn’t caused the financial crisis … The federal government also contributed to the auto industry’s problems with its lack of a realistic energy policy.”
It should be noted that state government is just as much to blame as Washington for the auto industries’ problems. Without state-issued corporate charters, Chrysler, Ford and GM would never have existed.
Customers would not risk their second largest investment to a car company in bankruptcy
As an aside, their are a vast number of renters out there, with little prospect of buying a home any time soon. So, for a lot of people, a car is their biggest investment ever.
Part of the reason bland and reliable has carried the day for so many big sellers for so long.
Good piece, and I’m happy to see somebody emphasize that Chapter 11 does NOT represent the disappearance of the company. It will remain in business, many dealers will stay open, employees will be paid (for awhile), and (some) vehicles will be sold. Chapter 11 is for reorganization, not liquidation, and GM is a textbook case for a company that needs reorganization. And ideally, as Fitisgo said, people would be encouraged that GM swallowed the harsh medicine to ensure its future.
But unfortunately, perception matters, and the public largely equates “bankruptcy filing” with “going out of business.” So a bankruptcy filing would be devastating for GM and those who depend on its survival, despite its intrinsic merit.
Therefore, government involvement should facilitate a reorganization similar to a Chapter 11 proceeding, without requiring an actual bankruptcy filing. An alternate procedure specific to GM could be “spun” more easily than a Chapter 11 filing as a measure to ensure GM’s continued survival. I read elsewhere that the Wall Street Journal has suggested an approach involving a receiver with broad authority, which might be a step in the right direction. (I’ve tried to find the article, to no avail. I’d like to know more about this proposal.)
This is what I’d like to see, because I do want GM to survive. But it needs to continue in a sustainable form. The notion of a pure bailout, with the prospect of business as usual after that, makes me sick.
I’m happy to see somebody emphasize that Chapter 11 does NOT represent the disappearance of the company.
It certainly does if consumers don’t want the cars (because they worry about the future of this major purchase), if lenders won’t provide loans for them (because they can’t predict their residual value) or if the existing creditors reject the reorganization plan (because they would rather take what they can get than hang in there.)
The idea of GM surviving Chapter 11 during this time period strikes me as a bit naive. At this point, a standard Chapter 11 filing would turn into Chapter 7.
We can all debate what GM should or shouldn’t do, but the idea of Chapter 11 resulting in a better, stronger company is a bit late, I think. A couple of years ago, yes, but with creditors and consumers downshifting as they are, no way.
2008 exposed the failure of the federal government’s energy policy when gas prices finally made customers care about fuel economy. CAFE had pushed all automakers, including Toyota, into a business model where carmakers gave away economy cars to average out against the large and powerful autos that could actually be sold for a profit. Then gas hit $4 per gallon. Sales of formerly-profitable large and powerful autos could no longer fund production of the always-unprofitable economy cars.
Add the recent finacial meltdown into the mix and the government is double guilty. From the policies that encouraged sub-prime mortgages to the non-policies that allowed the unregulated (and still unexplained) credit swaps, the government has everything to do with closing capital markets and scaring customers away from big-ticket purchases like cars.
US car sales have fallen from a 16 million annual rate last October to 12 million this October. Even Toyota loses money in a 12-million-sales market. Look at Toyota’s last earnings report: North American profits dropped by $3 billion in the first half, to a loss. No overpaid executives, no union, no retirees, no Hummers; but, still, no profit.
Sorry, TTAC. I agree with Cole and find the US government guilty for the current mess.
What irritates me about Detroit is the arrogance.
The palpable sense of entitlement, as in: you have to give us our bailout bucks, otherwise the country will go to hell.
It’s the old ‘what’s good for GM, is good for America’ all over again.
Shouldn’t Detroit be talking about how they can serve us, in stead of how we can serve them?
If they did that maybe they would rank a little better in quality, fuel economy and customer care. Or spend less effort fighting the air pollution regulation that the world needs. Or be a little proactive to get off oil, instead of keeping us addicted to it.
We need split-offs of TTAC like TTAA (agriculture), TTAE (energy), etc. to examine the BS put out to get and sustain ongoing subsidies and favorable tax treatment of business sectors across the board.
For oil in particular and energy in general, nothing beats theoildrum.com
njoneer :
November 12th, 2008 at 2:37 pm
CAFE had pushed all automakers, including Toyota, into a business model where carmakers gave away economy cars to average out against the large and powerful autos that could actually be sold for a profit.
False. Toyota and Honda routinuely beat their CAFE requirements by a great deal. If small cars were a loss leader to them, they would build just enough of them to barely meet their CAFE numbers (which is what Detroit typically does).
That is, without CAFE, Honda’s and Toyota’s product line up would not change. Detroit, however, would build more large vehicles and fewer small ones.
http://www.autobloggreen.com/2008/07/25/toyota-tops-07-cafe-numbers-will-increase-prius-capacity/
“The numbers for last year’s combined fleet fuel efficiency for all automakers in the United States has been tallied. The winner? Um, Lotus. But, they don’t really count. Too small. For manufacturers that actually offer a full line of automobiles, Toyota with 29.69 mpg just barely edged out the likes of Honda, which posted 29.49, and Hyundai with 29.37. All those Prius hybrid sales surely helped push Toyota to the top this year. Not surprisingly, the Detroit 3 didn’t even come close with 25.16 from GM and 25.15 from Ford. DaimlerChrysler propped up the rear with a dismal 23.97 average figure.”
With all of the black marks on D3’s permanent record during the past 40 or so years, bankruptcy seems like a breath of fresh air. Finally an honest and forthright business transaction that benefits the US consumer! It could be a redefining moment for the D3. Car buyers might actually consider a vehicle from the D3 absent the self-serving corporate denial, spin and general B.S.
To all those who want to give the big three more time to restructure.
GM in particular the other two to a lesser extent have been restructuring at least since 1979. Each time, they lay off thousands, change course and the end result is they lose more sales.
I submit, the government would have to give toyota, honda, nissan, etc. loss profit payout subsidies to cover them for their pledge to stop all future development of their cars sold in America. Then we loan the American three billions to restructure.
With the Japanese and Germans selling their old models year after year, the American companies will slowly regain sales with their newly redesigned models. Does this sound like loopy logic? Well it is.
The American companies while they are restructuring, with Government loans, will still be facing the latest iteration of the “foreign” products that have been eating their lunch for thirty years.
Further, doing all of this turmoil with the American companies shelving development on so many models, the foreign competitors are surging ahead with their newly planned models.
If we start the government loans, they will never end.
Excellent, excellent article, Robert. Cole is an arrogant buffoon, whose self-interest would be far less painful if he weren’t trying to obfuscate the true facts about the coming demise of Detroit. He has appeared several times on national media over the past couple of weeks, most notably on The Newshour with Jim Lehrer and CNN, debating Professor Morici of the University of Maryland. In both occasions which I viewed not only was Cole the arrogant, misinformed tool of the industry as you describe, but totally condescending to the Professor (and, frankly, anyone who dared take a position divergent from his or other industry flunkies, no matter how well thought out). Typical response when you can’t defend your position on the merits. And while I am far from an industry expert, I am somewhat familiar with economic policy and government intervention; when I e-mailed Cole directly, his flip condescencion as I dared disagree with him on the merits was palpable.
I don’t get it. Ford and GM (Chrysler not so much) already have frugal vehicles in production.
They just have to bring them here and federalize them. Okay I recognize that a Belgium produced car is not going to be a money maker but they could send the European blueprints over and start building them here with American sourced parts. Or they could build them in Mexico like so many other “American” cars.
The difference is that Detroit is going to have to promote these vehicles a little. Offer huge warranties on them (10/100K) and so on. Offer them at all of the GM dealers and not rebadging clones but as GM products under whatever names. Sorry but there are people who just won’t go to a Saturn dealer. They too well remember the plastic cars from the mid-90s. Put these cars (even badged as Saturns) on Pontiac lots and Buick lots and so forth.
Make it clear to all of the dealerships that they need to give the car customers just as much attention and service as the potential $30K SUV customer. No rolling of the eyes and wrinkling of the noses.
See people carriers, sell hatchbacks, sell sporty cars like the OpelGT mid-engined roadster thing, sell big Opels, sell little ones.
GM HAS frugal cars (more furgal than what they sell now). They just need to make an effort to sell them even if they aren’t high margin SUVs and trucks.
I still don’t support government bailouts. It will like so many of you have stated just delay the inevitable. Batten down the hatches fellow citizens because we’re screwed – either by failing businesses built around rapid consumption or because the gov’t is spending so much newly printed money that the dollar will be devalued. Can inflation be far behind?
Come spring I’m planting a garden.