A long line at the public trough

The Detroit Three automakers (remember when they were called the Big Three?) are up on Capitol Hill today begging the Congress for more cheap loans from the public purse.

Congress has already authorized $25 billion to help them meet the new 35 mpg fuel efficiency standards that must be met by 2020. Those loans are arguably OK. It is, however, worth noting that the private sector is not optimistic enough about the future performance of these companies to be willing to fund such a project.

The domestic automakers now want additional money to help them get through the current economic downturn. Their plan is that the taxpayer will hand another $25 billion, or more, of our money to three of the worst managed companies in the country.

Proponents attempt to justify the expenditure by talking about the effect on employment in the companies themselves, in the auto parts industry, and at dealerships. That they are able to keep a straight face verges on the miraculous.

Here are the real problems:

1. The United Auto Workers refuses to consider additional "concessions" with respect to excessively high pay rates and, worse, the disastrous work rules that reduce productivity and grossly increase costs.
2. The Detroit Three, after years of turning out poor quality vehicles that were also boring and/or ugly, have a revenue problem. The average sales price of a Ford Focus (quite a good car now) is about $3,000 less than that of a Honda Civic which is competing for the exact same market segment. Even though the Detroit Three are now making some decent cars, there are few potential customers willing to pay the premium prices that Toyota, Lexus, Honda, Acura, and BMW can command.

As a result of revenue shortfalls and high costs, the companies are burning cash at a very high rate and it is quite possible that they will all run out of cash by the end of 2009. The likelihood that they will start to enjoy positive cash flow, in the two or three years after 2009, is also low.

So, if loans are made, how will the money be repaid? This one looks like an expensive loss for the taxpayer and a short delay in the long needed reorganization of the domestic industry.

If the taxpayer is to help, then management, shareholders and UAW members are all going to have to take a very big haircut. That, however, may not be enough to save these formerly proud companies from forty years, beginning with the Chevrolet Vega, of incompetence and mismanagement.