Bustup Not Bailout
Bustup not bailout should be our rallying cry. Once upon a time busting up big companies was a populist movement. Its time for that movement to rise up again. Not so much to rid our society of monopolies but to rid our society of financial minefields that are ‘too big to fail’. I read a quote on twitter yesterday that said ‘too big to fail means too big to exist’.
And yet the govt’s answer to our problems is to push for more consolidation. Its nutty. Scale and complexity is the enemy of innovation and what ails most of the large businesses in this country, auto in particular, is a structural lack of innovation in the industry architecture
It takes something like 5 years to get a new car designed and built in most large auto companies. That’s too long. I realize that designing and building a new car platform is not like hacking up a new web app. But five years? C’mon. We have to do better than that
And we need to completely neuter the auto industry’s ability to lobby our govt to stop important initiatives like clean/alt+energy and mass transit. Its borderline criminal what the auto industry’s political efforts have done to our global competitive position right now
The same is true of the financial services business, the airline business, electric utilities, and a host of other industries
I am sympathetic to the arguments that we cannot allow the entire supply chain of the auto industry fail and I am certainly aware how many plants will close and jobs will be lost if we let GM, Chrysler, and Ford fail. Its a tough call and Obama has already staked out a pro bailout auto position
So I hope someone in his incoming team reads this and the conversations on this topic that went on via twitter yesterday. If we give taxpayer money to the auto business, it should be to finance a wholesale bustup of the business. One PE firm should buy Volt. Another should buy Buick. A third should buy Jeep. A fourth should buy Lincoln. And if a brand can’t find a buyer at any price with a boatload of taxpayer money behind it then it should fail
This is the best way out of this mess. We have to get the biggest businesses in this country smaller and nimbler, we have to get smart money behind them, builders not spreadsheet pushers, and we must focus on innovation not lobbying. That’s the only way forward that makes sense short of throwing them all under the bus and starting over
Note: I wrote this on the eliptical trainer at the gym so no links and prob some typos. I’ll try to fix both later
Comments (Archived):
I agree that smaller more nimble entities are preferable but it’s an insiders game and corporatism (eg, large corp entities w/ close ties to the political establishment) is key to keeping the game going. The new administration, imho, is still part of this machinery.If we want to break this cycle, we need to demand major structural changes in the way we elect our officials. Here are some ideas: 1) term limits; 2) overhaul of the tax code that eliminates tax breaks and deductions; 3) give the executive branch line item veto authority; 4) implement real campaign finance reform; etc…I realize some of these would require constitutional changes but if we want a government of the people, for the people and by the people, we need to cure the disease and stop treating the symptoms.MassMan
Some of these business are just too elementary for existence and repercussions of them going bust are just too severe. An airline shutting down is going to take a large number of small and medium businesses along with it as well.A lot of big companies don’t have the guts to cut the fat and if they are pushed into a corner ( by not being offered a bailout ), they may just be forced to price their services beyond reasonable limits to offset the costs. How do you deal with that ?
Throw them under the bus and start over? Hmmm…that’s a thought.Actually, there are several ways to do that (start over) which don’t involve throwing them completely under the bus. A pre-packaged bankruptcy (Ch. 11, not Ch. 7) would allow for necessary restructuring without destroying the company and its supply chain. Your suggestion to sell off the parts, if deemed appropriate, could easily be handled during the bankruptcy.At any rate, any solution that in any way tries to preserve any semblance of the current status quo should be a non-starter (do you hear that Pelosi/Reid/Frank?). At a minimum, those aspects of the business that currently make the Big 3 uncompetitive must be addressed — which means some lost jobs, lost benefits, and new management, etc.
I agree. There is no reason to bail these companies out. Assets being sold off to smaller buyers is exactly what would happen in bankruptcy court.http://www.realclearmarkets…With the Dems support of the UAW, I see the chances of a GM bankruptcy slim to none. The blame for this should be split fairly equally between labor and management.
yeah but consumers will not buy a car from a company that is perceived as failing because they will be worried about the long term parts and servicing. GM is leveraged to make it to the release of the Volt and they have bet the farm on it.
I’m working to get you better read in Washington. Thanks for this.
I’m in DC… Ill help with that ๐
The supply chain in the USA automotive industry (old line) was F-ed up before this fiasco – not a new fiasco, but one that is has been brewing for decades. Give them 30 billion, they will surely be nearing bankruptcy in just a few years later than normal. Delphi, and their ilk, the monolithic suppliers that were split off from the big three, are doing no better after all of the sad group was reorged. See my report that FT paid for, its free for you all now http://www.scribd.com/doc/2…I don’t think TATA and the Chinese baby auto industry is taking 5 year design cycles! Most of what happens in Detroit can be traced to old, bad legacy practices and Union abuses, and I’m pro Union. But in these cases they really F-ed it up. See any labor pool job bank parking lot in Motor City, each one has a sign that says, “no Foreign cars”. Dont dare park in those lots if you have a Toyota Prius, it will be vandalized.Bad mindset, bad practices, and lack of the will to Wannna – http://bizcast.typepad.com/…We have the engineering talent and ideas, but a new edifice of operations and management will be needed that is more agile and competitive and willing to take risks in the consumer market. Look at the smart car.
Think Japan. Bailing out the auto industry will make the problem worse. Do people really think that if GM goes out of business that people will not be able to get cars? This will be a gigantic mistake and will postpone the pain for a LOT longer. American cars companies do not make any car worth buying anyway. Fred, lets pretend for a bit that you somehow you were the lead investor in GM. You are sitting in a board meeting. Would you shut it down or double your investment? In my way of thinking GM is like Webvan. No matter how much money you pour in the result will be the same.
US car manufacturers simply don’t build cars that people want to buy. This has been clear for more than 20 years and repeated bailouts have just prolonged the problem. Look at Chrysler models – unbelievable. Let foreign or domestic corporations buy the effective brands and let the rest go. Does it really matter who owns the manufacturing and development cycle? Ford owns Volvo, BMW manufactures in the US, Nissan manufactures in the UK, etc. How did the Daimler Chrysler merger go? Lead boots.
You know, we’re long overdue for that ridiculous statement to simply die off. US cars were god-awful in the 70s and 80s, thanks mainly to hamfisted Congressional fumbling of mileage and pollution controls. I’ve owned 49 vehicles in my 20 years of driving, and the Suburban I bought January 07 is hands-down the best vehicle I have ever owned. This includes comparison to two Benzes (one quite high-end) and some other very respectable vehicles.
Oh yeah — Daimler-Chrysler. That wasn’t a merger, that was a Daimler-Benz hostile takeover with the sole intent of propping up the Benz side using the roughly $450 billion in cash that Chrysler was sitting on. There used to be an interesting site called “car-truck.com” which tracked insider information about Chrysler, but I gather the Germans made life legally difficult for him when he started reporting extensively on the ugly details behind the Daimler-Benz raid. Then they brought their god-awful electronics to Chrysler (the same thing that ruined Benzes around 2003, switching from Bosch to cheap Japanese sources) and so far Chrysler hasn’t recovered. The “lead boots” came from the non-US contribution to that “merger”…
I think it’s time for complex development projects to become structured in new ways. Stage-gate models should be made obsolete and replaced with much more effective and interesting collaborative models. Everybody wins: the builders get shorter and cheaper dev cycles, users get more interesting vehicles and changes to the models can be iterated much quicker and more frugal. Apart from some safety issues, I don’t see why cars couldn’t be in ‘continuous beta’. In fact, a lot of them are โ in a bad way. Thats why dealers and garages make so much money.Maybe we should put a company like IDEO in charge of one of these car brands.
No, then you’ll get the car built for Homer.
So what of Tesla?
The auto bailout should have 2 components. The first piece gives the companies enough cash to keep the lights on for another year or so but operating in a survival-mode state. The second piece should be spent on unwinding / shutting down part of the big autos (i.e. unemployment benefits and job training).Also re: lobbyists, it doesn’t help that over the years Washington has imposed arbitrary rules and regulation on the big autos, that’s what set the stage for the rise of lobbyists in this whole affair.
I agree, and am also sympathetic to the entire food chain of business and people that are at risk by a failure of the big (not anymore) 3. Having said that, the reality is that there is just too much capacity in the auto industry (too many car makers).We moved from an agricultural economy, to an industrial economy, and now into the new service economy…time to finish (albeit painfully) the transition. We need to continually move up the food chain, and the manufacturing of cars is counter to that.www.twitter.com/A_F
A big bust-up sounds great, but I’m not sure it really happened the first time. Yeah, it was a popular movement and the politicians gave it a lot of vocal support, but they ended up doing more to promote the culture of consolidation and corporatism using the bust-up as a cover. I mean, the Federal Reserve was sold as a means of neutralizing the big banks, but today its just the institution that feeds them. Standard Oil was put to rest, but JDR still walked away as a majority shareholder in all the new Congressionally-created splinter companies like Exxon and Mobile and Chevron.So how do we really enforce it? MassMan gives some good ideas, but how are we going to find politicians who will support that agenda?
Agree. Any government bailout of the auto industry should wipe out the equity and essentially work like the insolvency reorganization that it is, with perhaps the gov’t playing an active role in making the liquidation go more quickly and smoothly than it might on its own (and perhaps making some capital available to avoid seeing the huge supply chain disaster). Would love to see the big monoliths broken into smaller pieces with their own capital structures. Some will be agile and succeed. Some will fail. That’s the only way to try to save an industry that has ruined itself. A traditional “bailout” will merely delay the inevitable.
Breakup before bailout July 15 2008: http://andyswan.com/blog/?p=46
You are always way ahead of me andy!
Never….that’s why when I am I cannot stop myself from comment spamming!
There is a difference between a business that has economies of scale and a natural monopoly. Autos are scale, but not natural monopolies. Electiricity, and airlines are natural monopolies. They need the power of imminent domain to run in even a halfway efficient model and therefore must submit to regulation. Society benefits from their existence and scale. Not so for autos. Effectively we are being asked to subsidize a few hundred thousand people, workers, because they work in an industry that has not kept up with the technology or business environment. The autos put the buggy whip and bycicle businesses aside. It’s time for them to do the same. Is it painful? Of course, but GM cannot survive in its current structure. Toyota can last longer, but only longer, not forever.GM must file bankruptcy, BEFORE any bail out or sale. They function like a government. That is to say slowly and inefficiently. Time to change and let the ones that are most agile and most responsive to their business environment to thrive.
> Electiricity, and airlines are natural monopolies. They need the power of imminent domain to run in even a halfway efficient model and therefore must submit to regulation.Airlines don’t need the power of eminent domain. Airports may, but even that’s arguable. Municipalities like to use eminent domain to create airports, but that’s because eminent domain is how municipalities work.Electric distribution requires right of way in some cases, but they’re mostly local. For long-haul, there are lots of alternatives. (There’s no “right” to cheapest route.)
I don’t think you can bust up GM or Ford into their component core brands. Each brand is not a discrete product — they’re merely individual brands slapped on top of common components (engines, transmissions, suspensions, etc.). In other words, GM’s pontiac, chevy and buick, for example, are really (and sadly) just different versions of one product. This doesn’t apply though to outliers like hummer, which shares little with other gm brands.
I think its the organizations that need to be busted up more than the actual car itself. That can come later
I don’t believe in too big to fail.Fred, I agree with you. However, you forget to place at least part of the blame on the unions. The first 2k of every car coming from Detroit goes into the union pension fund. In the factory, only union people can perform certain tasks. If a non-union person carries a box then the automaker can get slapped with a fine by the union. So, the box ends up sitting there until it is move, sometimes days (this is a very realy analogy).I would say half the blame is on exec’s and half on the unions. It is reminiscent of the fall of American steel–Steel execs fail to adopt new tech, union demands heighten cost of labor, overseas competitors adopt new tech, and overseas competitors don’t have expensive labor.
I agreeWe need to be really tough on the unionsThey are a big problem in the airline industry too
here here Fred – i am agreeing with your point of view alot lately! mildly concerning ;)wattching CNN last night, Ted Turner was being interviewed by Lou Dobbs. See Teds view on the GM dealhttp://www.cnn.com/video/?/…It is calssic ted turner – love or hate him.
I love ted
The now ancient history of the UK auto industry should be a lesson to all. As a nationalised industry, it failed in the 60s and 70s to innovate, was beholden to excessive union demands and squandered vast amounts of tax revenues as it inevitably declined. Today, essentially, it does not exist.The political problem was then (as I imagine it is in the US now) that the size of the industry and its suppliers was so great that the decline had to be managed from a social impact perspective. But the UK lesson and that of many nationalised airlines around the world now is that if a bail-out merely maintains the status quo, it is only delaying the inevitable.No investor invests in the belief that nothing much is going to change, so if an industry is in so parlous a state that they have to ask their taxpayers for cashflow, then they must expect significant change to be part of the deal.
What’s your stance on the union issue? I think the bust up thing is an excellent idea, but worry that the unions would do their usual thing and foul the water of any deal like this.
Unions will have to play ball or there should be no bailout
Fred, I could not agree more. But don’t hold your breath waiting for Obama to come around to this perspective. Firstly, he needs to keep his labor union support, and with the bust ups to which you refer also comes the bust up of unions. Secondly, the “too big to fail” mantra actually works hand in glove with a politics of bigger government. Your proposal is the complete antithesis of that.
I think this is why the incoming administration should consider a Paul O’Neill do-over. (Read Suskind’s “The Price of Loyalty” to get an idea of the former Alcoa chief.)
semi-related, but how are you able to type on an elliptical? aren’t you working out and bouncing?
Don’t bust them up, Mash them up. What GM needs is an Executive Mashup. It needs to channel Steve Jobs to build the iCar, much as Mercedes channeled Swatch to build the Smart.More about the iCar on my blog here:http://smoothspan.wordpress…Cheers,BW
“And we need to completely neuter the auto industry’s ability to lobby our govt to stop important initiatives like clean/alt+energy and mass transit. Its borderline criminal what the auto industry’s political efforts have done to our global competitive position right now”That damn first amendment. How dare people lobby against policies we support!We need to immediately criminalize political participation!
Good idea ๐
But seriously brian, should the govt be bailing out an industry that has spent tens maybe hundreds of millions lobbying for or against laws that have simply hurt the US’ long term competitve position?
I think the NEA and AARP have done more to hurt American competitiveness than the car industry.We have freedom of assembly and the right to petition our government. Private companies, unions, and ctizens groups all have the right to lobby.I disagree with the auto companies’ views, but I defend their right to lobby the government.If receiving government money should take away your right to lobby, then ACORN, the NEA, SEU, clean tech VCs and AARP should not be allowed to lobby either.
The sooner the lumps are taken the sooner things will return to “normal” meaning the fleecing can start once again – which sector next time. However, the powers that be think they have too much invested to lose and hence will throw good money after bad. Either way, I love both as it creates volitility and a that is a traders dream come true. LOL at the insanity that is wall street and the STOOPID politicians that orchestrate into their hands.
Word!
Maybe GM should fail. It killed the electric car, it thrives on defense contracts, it pushed SUVs harder than anything. Let someone buy the assets, sure, create new companies out of the rubble. I hate the idea of all of those workers being put out, but how about just handing over ownership to the workers? You’d see a much better run company.Yeah–split it up. let the parts thrive or die. And hopefully they’ll thrive. And hopefully pensions and employee investments won’t get crushed along the way.
Why is thriving on defense contracts bad? I drive up and down a street and see lots of GM and Ford SUVs, and this is because they were “pushed” on people, or because those people chose to buy them? I wanted a Suburban because my brief attempt to live with a smaller SUV was miserable.Ownership to the workers? You mean the unionized workers that are dragging it down now, or some idealized worker as-yet undiscovered?
Hey Fred,Perhaps you’ve covered this before, but I’m struck by the stark contrast in tone between the comments to this post on AVC versus the comments on the reprinted version of the blog that appear on Seeking Alpha.Re: blogs & community. Based on this one data point, it seems like visitors to your own site are much more persuaded by the bust up argument than visitors to Seeking Alpha (who, based on a small sample, seem pretty hostile). http://seekingalpha.com/art…Have you ever thought to try to merge the comments from the two communities to spark debate? Is that even possible?
I donรขยยt read the comments at seeking alpha unfortunatelyI would love to have a single consolidated comment threadAlley insider does that for meI just asked David at Seeking Alpha to do the same
Fred,100% agree. My hope is that the Obama team has a more ‘nuanced’ opinion on the topic, and that the public message is meant to calm the nerves of people with related jobs / investments. Simply bailing auto GM et al would be throwing good money at bad. We need more innovators like Tesla Motors in this country. GM and (to a lesser extend) Ford have failed over and over again to innovate and so are being crushed by the competition (as they should be).On a personal note, my family has a small business that serves the industry and they lost most of their domestic customers years ago. Largely, this was because GM and Ford did not want to pay for quality or innovation. Their only tactic was hammering their suppliers on cost. This, however, had the net result of forcing many of the smaller suppliers into bankruptcy, and further pushing manufacturing into countries like Mexico. Meanwhile, (and not to sound boastful), the small business that my Grandfather started has grown substantially in serving the foreign autos who make quality cars here in the states.
I have to ask – what did you use to write this up this post at the gym?
My blackberry curve. I post via email to typepad sometimes
good thoughts (also, see Friedman in today’s NYT), but, well, we tried the PE firm route with Chrsyler already, didn’t we?
Why is it impossible to follow the money, and stop it? Or stop the outflow from continuing?Surely this can’t be happening in real time, without such corporate-sideemergency plans having been contemplated. If they were considered, then there’s was engineering at some point to enhancewhat we’re seeing; a historic robbery of the people.
Fred, a 5-year turn-around for a completely new vehicle isn’t really that bad. Read up on the history of the industry, it used to be more like 10 to 12 years. In the 90s Chrysler got it down to only about 3 years before Benz raped their coffers and bogged them down. But there are simply a lot of parts involved, a lot of suppliers involved, retooling, training, and of course the thousands of hours of mandatory government testing and reviewing and filing to be done. Chrysler’s 3-year turn-around was likely the absolute best-possible concept-to-delivery time possible and it required billions of investment, which I suspect rapidly became outdated without large continuous investments in updating the whole system.Cars aren’t simple, they’re just carefully constructed to look that way. Familiarity breeds contempt…
you should keep any patents and technology sold off from the company within a company in America. I’m all for a company being punished for not reading the green market… but much of a companies value is Research & Development and I would be for regulation keeping American corporate secrets in America. http://digg.com/political_o…
I am extremely frustrated with the TARP plan and the US Government bailout. I don’t understand why we are bailing out failed companies in a capitalist economy (at least it used to be)? Isn’t the whole point of capitalism is to have success and failures and that we learn from it and move on so that we can innovate and change and make our country more competitive and a leader in the long run? GM should fail. AIG should fail. They should all go under. We will go into a depression but, you know what, at least it won’t happen again! You learn from your mistakes. With GM failing, it paves the way for an entrepreneur to build the next leading US car company with smaller cars that run on alternative energy. The government is investing the citizens’ money into failed and dying companies that are failing for a reason – they have failed to innovate (i.e., they should go bankrupt!). The way the government is doing things now, no one will learn their lesson and when we eventually we come out of this people will leverage up their balance sheets once again and the same thing will happen in ten or fifteen years. No one learns their lesson. When your child calls you half way through the month saying that they need more money because they have spent it already for the month, what do you do? I don’t know about you, but I tell them to find a way to make it and hang up the phone! If you give them more money, they will never, ever learn. This is a small example, but should be applied to a bigger cause with this crisis.
Agreed, too big to fail is not a strategy for running/growing/fixing a business. I’m all for the nimble innovative approach. However, we can’t ignore the FACT that Toyota and Honda have done great jobs and they’re both huge. There must be some other ingredients missing in the Detroit water.
I think you know very little about the auto industry.1) 5 years to make a car is actually pretty good. especially if you are not making just a face lift. just testing components takes around 1.5-2 years at least. how can you make a car that lasts 20 years if you could only subject it to fatigue for 1?2) if you want to sell GM by part and make auto industry made of small producers, then you should be prepared to pay around $80k for a car that usually costs $30k. having different companies allows for synergies, and it is these synergies that allow to bring down the car cost. without these synergies car companies will have no money for innovation you speaks of. if you don’t believe me, name me one good comfortable car that is produced by a completely independent make and costs less than $80k?
the problem is we are talking theory of ideal capitalism. when a government allows a company to get as big as these companies have… then there already is socialism. yes it should fail and we should let it fail… but tough love is not enough. we need to make sure cancers like these corporations never come back in these sizes. I get it that synergies save money…. but GM sized companies are beyond that obviously. you don’t need “Big” government to break up “Big Companies”.
GM, was created by Socialism! It is not competitive, period!Should we let GM fail? IMO, No! So how do we deal with it? The best solution is to slowly nationalize it. There is no other choice. Socialism spurs more Socialism.America will keep Nationalizing assets or it will have riots and a revolution on its hands!What is the alternative? 20 to 30 % unemployment and Marshal Law?As the social economic cycle takes its natural path, we will come back to capitalism and laissez-faire economy. It is unavoidable, because of global competition.
At a certain point there has to be a crash http://simonstudiotheatre.b… …it is unavoidable when you don’t have breaks! and wow check it out folks…. I agree with the NYTimes! http://www.nytimes.com/2008… there is a first for everything
i agree. perhaps the big three can become six or nine better companies. they need serious restructuring. its time that government stops propping them up and starts tearing them up.
the problem with the U.S. auto market is our labor is too expensive. I’m not one to blame this entirely on the unions. If there were multiple car companies some union and some not then the companies doing better could “reward” their labor better based on success. Because there are only three companies the business model was socialized before it was socialized. The infrastructure collapse is caving in. If we give them money and set them on their way we should break them up as well and reset union agreements based on a contractual merit