Is the Auto Industry Worthy of a Bailout?

One of the best selling issues of Consumer Reports each year is the annual auto edition, which just came out in April. Last fall I wrote that the primary reason the auto industry has been in a world of hurt is that people who wanted cars in 2008 were unable to get credit and therefore could not have their thirst quenched. This was, it turns out, only a partial reason.

GM has been losing money by the boatload since 2004. And Chrysler's reputation among auto mechanics, those in the know, has been shameful.

So it comes as no surprise when Consumer Reports gives both these companies failing grades in their “Automakers report cards.”

According to Harvard economics professor Greg Mankiw's blog commentary:

Page 15 was particularly enlightening. There, in their "Automakers report cards," Consumers Union summarized their findings for each of fifteen major car companies.

Dead last was Chrysler. CU recommended zero percent of the Chrysler vehicles they tested. That's right--zero. Second to last was General Motors. CU recommended 17 percent of GM models. By contrast, most other companies had half or more of their models get the thumbs up. Honda was the top ranked brand; CU recommended 95 percent of its models.

Is it any surprise that Chrysler and GM are now in the process of going out of business? From the perspective of the Consumer Reports advice, it looks like their business model was to count on the ignorance of the buying public about the quality of their products. Their bankruptcy should perhaps be viewed as a success of the market system.

Some people still insist that we need to encourage our citizens, or even pass laws, to “Buy American.” Why don’t we just tattoo the word STUPID on our foreheads?

O.K., that's a bit harsh. It will be interesting to see how this story unfolds. GM and Chrysler did not dig themselves into this hole overnight. The reputation of their products has been assembled piece by piece.

Note: Picture at top left is titled, "Man with a Puzzled Expression On His Face."

GM Suffers Unhappy 100th

Armchair quarterbacking from the sidelines, things are not looking up in the U.S. economy any time soon. A year ago I had dinner with a publisher who predicted a bad year in 2008, and it looks like he weren’t a-kiddin’. Unfortunately, the shakeout that hit the housing and financial markets has not worked its way through the system yet. More fallout is clearly in the cards as the auto industry staggers to remain the viable, reliable heartbeat of America.

Since the end of 2004 General Motors, biggest of the Big Three, began losing money in great rivers of red ink… 73 billion dollars now, and still flowing. GM, which should be celebrating in this year’s 100th anniversary, is sweating, hands outstretched, seeking help from the rich uncle who just finished throwing gobs of money at the banking sector.

Third quarter losses for GM were $4.2 billion. GM shareholders have seen the value of their holdings fall 82% this year alone. Many industry watchers have said that without federal aid, the company could collapse resulting in a loss of 2.5 million jobs (after factoring in those many businesses that subsist on sales to the giant automaker.)

Dennis Virag, president of the Automotive Consulting Group in Ann Arbor, told Bloomberg Television yesterday that "either the federal government provides money for a bailout and lets the industry retool, restructure, and move ahead, or the industry dies.''

How did this happen and how bad is it really? Did GM put itself in a bind by making cars that consumers weren’t interested in? The top selling cars last year again were Hondas and Toyotas.

I remember the Ford slogan two decades back, “Have you driven a Ford lately?” My 2008 answer is, "Have you driven a Honda lately?" No offense, but “Buy American” is not going to fix our woes unless American manufacturers pull their heads out of the sand and start making quality cars that consumers want.

GMs woes, howwever, are not all their own making. The banking collapse has been a devil of a problem for all the automakers. In 2007, more than 80% of people wishing to buy a new car could get financing as opposed to 33% in September this year. Tight money has left an already languishing U.S. auto industry in dire straits.

Yesterday, the drums began beating for a bailout. Too many people have a vested interest in keeping GM alive. But where does this money come from? I’m not sure I really want to know.