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Will Automakers Get the Next Bailout?

The Big Three go begging for loans

Anthony Randazzo
September 12, 2008

The Big Three automakers-General Motors, Ford, and Chrysler-are lobbying Congress for up to $50 billion in government handouts. But don't call it a bailout, they ask. It's just a loan.

Of course, for Americans, it's hard to see how federal loans, at taxpayer expense, offered below the market price, with a few companies being given special treatment in a time of crisis, are not a bailout. Regardless, this is bad for the government, bad for taxpayers and bad for the automakers too.

First, there is an important question about the "loans": are the Big Three good for the money? Right now they are hemorrhaging money. Last quarter, Ford reported losses of nearly $9 billion, and GM said its losses were in excess of $15.5 billion-which is more than twice the market value of the company. All three automakers are already deep in debt. Ford had $38.5 billion in corporate IOUs at the end of June. And they all have absurd labor costs as they continue to pay unemployed United Auto Workers member salaries for up to two years after layoffs. The average out of work UAW member with two children receives about $55,000 a year, plus benefits, draining away resources.

We're basically talking about handing a low-interest loan to a very high-risk borrower-a concept we've come to know all too well with the subprime mortgage collapse. Already burned by a collection of unqualified borrowers, no bank is willing to offer this kind of investment to such risky clients. And if no bank considers them risk worthy, why should the American taxpayers?

This brings up another critical concern: why should every American-even those who don't drive at all, or don't choose to drive an American car-be forced to prop up carmakers? It is not the role of government to shore up failing businesses. But Washington, DC, doesn't seem to recognize that.

The government has recently decided to bailout airlines, Bear Sterns, Fannie Mae/Freddie Mac-believing they are too big to fail. Apparently K-Mart, Napster and Bennigan's missed the boat.

If one of the Big Three automakers is on the verge of failing, then the government should let it file for bankruptcy. Giving a struggling company more money doesn't force management to admit, and correct, its mistakes; it just muddies the waters. These loans only perpetuate bad operational philosophies and drag a company's problems further down the road.

Instead of a bailout, the federal government can better support the automakers by offering federal tax credits, freeing up capital to invest in new technology, which is what the Big Three executives say they need these loans for.

If the government cut diesel taxes, it might encourage more diesel-run vehicles that get better gas mileage and would open up new sale opportunities for the American companies. Ford has a "clean diesel" car that gets 65 miles per gallon, but they can only sell it in Europe because of high diesel taxes aimed at truckers in the United States.

The government can also repeal regulatory barriers, such as the recently passed increase in Corporate Average Fuel Economy standards, which requires cars to get at least 35 miles per gallon by 2020. The market is already moving people towards more fuel efficient vehicles, but the mandate may force firms to increase development spending beyond their capabilities.

The biggest problem for American automakers is the perception of their products. Presently, U.S. companies are making very good cars, but the perception is that the Honda Civic is inherently better than the Ford Focus. That is a huge public relations problem that can crush sales figures.

Similarly, with high fuel prices reducing driving, Toyota has done a great job capturing the hybrid market with its Prius. You might not know it, but the Big Three have released effective, though poorly marketed, hybrids of their own such as the Ford Escape.

Already handicapped as "behind the times," and viewed as incompetent by many consumers, the additional image of begging for money from the federal government only aggravates carmakers' public relations problems. American automakers need to focus on their products and brands, not fleecing taxpayers for loans. Certainly, there are things the federal government can do to support the Big Three, but bailout loans are not the answer.


Anthony Randazzo is Director of Economic Research


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