The world economy is suffering from a deep economic recession that has driven thousand of companies onto the brink of bankruptcy. The news casts and articles paint a gloomy picture as the situation seems to be progressing from bad to worse. The American economy has not hit such a low economy in the last twenty five years and the crisis is crippling several sectors (Economist, 2009).
The three major automakers however, have had financial difficulties way before the recession became an issue of international concern. General Motors, Ford and Chrysler have had financial troubles for over a decade now and these troubles do not look like they are about to go away.
Why the government should not bail out the big three
I give three very simple reasons why General Motors, Ford and Chrysler should look for other alternatives other than federal funding to sort out their financial woes. They are three very basic questions that might appear overly simplistic but they are also very fundamental and have a lot of weight.
Does federal bail out really help?
It would be a cheaper option to close General Motors than it would to restructure it and remodel it so that the automaker is in shape to compete with the leading car makers on the market today. A restructuring of the three automakers would mean shedding of their fixed obligations and the automakers may not be ready to do this voluntarily (Rampell, 2008).
What the three automakers is a serious downsizing and re-branding as well as a new management structure. It would be like a reinvention from the bottom up. This means serious money running in the double figure billions of dollars. The whole process would be complicated further by the fact that the market would not stand still as GM, Ford and Chrysler reinvented themselves. The three automakers would have to contend with remaining relevant while at the same time restructuring themselves. That would take quite a feat, and a whole pot of money (Rampell, 2008).
Trying to save the ailing automakers by handing them federal bailouts is the same as trying to mend a crack in the wall with paper glue; the glue is ineffectual because what is needed is cement and even if glue is poured into the wall for a year, the wall will not be mend.
Who is paying for it?
The figures in billions of dollars that have been handed to the three Detroit automakers as financial aid are staggering. In December 2008, the former government gave GM and Chrysler 17.4 billion dollars to save them from going bankrupt. It was not the fist time. GM has accumulated 13.4 billion dollars in federal loans while Chrysler has 4 billion dollars in loans. The two automakers still need more money that will come up to almost 22 billion dollars that they are still trying to get from the government (Economist, 2009).
Those who support the government bailout argue that the closing of these three motor giants will have a drastic negative impact in terms of the loss of jobs both direct and indirect as well as the loss of America’s share in the car market. What they have not fully considered that just keeping these companies afloat is more expensive while at the same time unproductive with long term consequences that are more grievous than if they were to go under now. The money that has been poured into these three automakers has not helped them to date, what guarantee is there that further financial aid will, if the same policies and management structures are still in place? (Economist, 2009).
Can we afford it?
The automobile industry is not the only one that has been badly hit by the economic crisis though their situation is a more chronic. Wall Street has also been bailed out by the government (economist, 2009). The question at a time like this is what are the priorities of the American government in terms of the needs of the American people? Is it more important to pump ten billion dollars to keep GM afloat or is it more urgent to put this money into stimulating the recovery of the economy? The bail out is taxpayers money which they shell in the hope that there will be better social safety nets in place and that they will be provided with better social amenities (Rampell, 2008).
There is an African proverb along the lines of if you box a stone wall; you will definitely hurt your hand. The three big car manufacturers saw it coming yet did not make any major efforts to change it. A fundamental business principle is that a company is meant to be flexible to and react with lightning speed to change. Yet GM, Ford and Chrysler undermined this principle.
There is no question that the companies’ management played a major role in bringing the automakers to their knees. Had they been more prompt to reading the changes in consumer and market trends, they might have had a different story to tell today. Pride has not helped these automakers one bit and the same pride continues to hurt the taxpayer who feed these insatiable giants lashing in their death throes.
Rampell, C. (2008). A ‘Big Three’ Failure and U.S. Auto Making. Web.
The Economist (2009). The American Car Industry in Pieces. Web.