Why we should bail out GM and Ford

Well, I can think of one good reason. People work there. OK, there’s the end of that side of the argument.

The littler three auto companies already got $25 billion to help them get rolling with some new initiatives earlier in the year. A big question right now is whether we should help them get their hands on another $25 billion to help retool their factories (presumably with some additional Canadian funds tossed into the pot as well).

One could ask, to start with, why they need such enormous sums of money. Aren’t corporations supposed to be good at concentrating wealth in their own hands? Well … companies that are good at this stick around for a long time and companies that aren’t good at making money either change or go extinct.

As lots of people know, American auto makers have been making quite sizeable and inefficient vehicles for the last number of years, despite rising concerns about sustainability, climate change, and so on. It’s hard to blame them too much, since we the consumers (not counting me) have been buying the enormous vehicles. All the same, most of the rest of the world has put together more stringent efficiency standards than North America, and GM, Ford and Chrysler have had the nerve to claim that these efficiency standards were protectionist measures that excluded our SUVs from competing in foreign markets. Not surprisingly, when the price of fuel recently shot up, demand for vehicles made by these dinosaurs collapsed.

Of course, there are all the problems with the credit markets that have made it exceedingly difficult for auto makers to offer the generous credit conditions that they often use to encourage people to buy new cars and trucks.

Altogether, it can be said that the companies set themselves up for disaster, and now that disaster is hitting, it’s really hitting.
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To change the topic briefly, let’s consider the optimal time of investing in a green economy. I asked myself this question some time ago. In a conversation with someone who works in the finance industry, I suggested that companies in green energy would be a great place for long term investment.

Main problems in investing early in green tech as a portfolio investor would be picking the right companies. This could be largely taken care of by pooling investments through an investment vehicle such as a mutual find. Still, the problem of timing comes along.

I realized, sadly, that the optimal investment strategy was not to take the very long term picture. The optimal strategy for an individual would be to stay in the unsustainable model for as long as possible, and try to jump into green energy just an instant before it really caught on.

Do you see an analogy here?

Both consumers and the auto makers have been playing this unfortunate game. The consumers have been funding their profligate tastes by consuming at a rate well beyond sustainability. The companies have acted in accordance, by taking some very limited endeavours to develop products for the markets of the future, while focusing on their high-margin markets such as SUVs, light trucks, etc.

That is to say, that the North American companies have been investing all their capacity into short-term unsustainable growth, and are waiting until the last possible moment to switch to producing more efficient vehicles that would meet the needs of a future economy.

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Back to the bailout.

Now if you don’t think this was a calculated risk, then you have more, or less, faith in the leadership of the big auto companies than I do. I’d suggest that either one points to poor handling by management in recent years.

In the more optimistic case, the auto makers were caught completely unaware. Toyota, Hyundai and other manufacturers were bringing efficient cars into our markets, while making cars that passed the efficiency requirements of other markets. Meanwhile, they designed a number of enormous vehicles to meet the tastes of North American consumers.

In this perspective, the North American auto makers were completely outmanoeuvred by foreign competitors who designed cars that competed in more markets, that were more efficient, were more attractive to consumers who worry about the costs of gas or climate change, and that were more sellable in uncertain economic times due to their greater efficiency and affordability. The North American auto makers could thus be seen as ignorant, or as poor strategists. They tried to profit from high-margin, large vehicles, and lost markets share over a long period of time due to an inability to shift to a new strategy.

In this perspective, bad strategy merely combined with hard economic times, leading them to burn through billions of dollars a month while looking for a way out, while looking for a way to survive through the present economic difficulties.

This is, more or less, what the industry seems to suggest has happened.

I went onto the websites of GM, Ford and Toyota yesterday. This is by no means a scientific comparison, but GM, and Ford made lots of really big trucks and cars with relatively poor fuel efficiency (and had a couple of small models), while Toyota offered a large variety of small, fuel efficient cars, as well as a decent line-up of minivans and trucks, with a few monsters to boot.

My immediate thought was this – Toyota has been planning for the future for a long time. This was significantly helped by the fact that lots of international markets have better efficiency standards than we have in North America, but all the same, they simply make more efficient vehicles. The American manufacturers, however, made lots of big cars and trucks that clearly had no mind to sustainability.

I couldn’t help but think they were playing the apparently optimal strategy of trying to squeeze every penny of profit out of the unsustainable economy before a rapid switch to the new economy. They wanted their competitors to take all the risks in testing new strategies in auto markets while focusing in high-margin SUV and light truck markets for as long as possible.

Now, they want us to bail them out and help pay for the process of retooling their factories to make something that is less unsuitable for the future economy … after they failed to plan for it like other companies did.

The problem is that they got caught with their pants down when the credit crisis hit. It’s tempting to just take some photos and laugh, but the reality is that millions of jobs in North America depend on this industry. Green as I am, I recognize that people will continue to drive cars for some time. They should be smaller, greener cars, of course, and they will be … although I hesitate to consider any sort of car ‘green’.

Do I care if we make and buy Toyotas or Fords in North America?

Well, personally, not really, but I am not insensitive to the idea that it is of some strategic advantage to have technological innovation happening in our borders. This argument is pretty weak these days due to the rapid diffusion of technology across borders, but we can’t pretend that this argument doesn’t exist.

There’s also the whole thing about where the profits go … if profits get sent overseas then it doesn’t benefit my neighbours or their friends and family as much as if the jobs were local. Then again, my neighbours might be able to make more money making things other than cars. The problem is that economic logic plays out in the long term, but short term pain may not be politically acceptable.

Lots of people are going to lose jobs in the auto sector in the coming months or years. Some people argue that this means we should fork over billions in aid to companies who largely created their own problems.

I don’t think we should do nothing about the shrinking pains in the auto sector, but if we are worried about the effects on families, we should be supporting efforts by these people to shift into an area of the economy that has a future.

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To finish off, let me tell you Stalin’s greatest strategic mistake. He bet on heavy industry.

In principle, his approach to economic growth should have worked wonders (and it did in the first few years). He determined that as much of production as possible should be recycled into physical capital in heavy industry. This view was driven by historical evidence that rapid economic growth was fuelled by growth in heavy industry.

There was one major problem with Stalin’s analysis though. Heavy industry was a major factor behind early industrialization and growth in the century preceding his rule. Growth industries after the 1940s collected most of their gains in industries that were outside the scope of heavy industry.

Our auto makers are now telling us that our economy needs enormous infusions of state capital to protect our economy today and in the future.

Stalin bet on old growth industries. New growth industries will be green.

Yes, limit the damage to Canadian and American families who presently rely on the auto industry. Handing out billions to keep them making things that society and the economy don’t need is not only a disturbing waste of economic resources, it is a sign of incompetence among the financial planning elite.

What do I suggest? Spend the money supporting the families. Let the companies go bankrupt if they must, since this will reduce the glut of capacity for cars that do no favours to a sustainable economy. Betting public money on an unsustainable industry in relative decline cannot possibly be the solution we’re looking for. If communism taught us something useful, it’s that one of the worst ways to maintain employment is to support industries that make things that people don’t want to buy.

I’m not convinced that we need a huge auto industry, but if we are committed to it, then maaaaybe whatever comes out of the ashes can receive public support for retooling if credit markets continue to be gummed up.

Maybe GM will come to be known as the largest maker of wind turbines around.