The Auto Industry: A Bad Investment

I talked about the failure of the auto industry in North America before. This odyssey just seems to keep dragging on so its worth another look at. Since I first wrote up about the issue back in June, things have only got worse for the so called "Big Three": General Motors, Ford, and Crystler. GM is now threatening another round of massive layoffs at the Oshawa plant. The big question today is whether the federal and provincial/state governments in both Canada and the United States should bail them out again. There's a lot of debate going on on both sides, but in my opinion, the answer is quite clear. Imagine you have a buddy who comes to you and says they need $100. He promises he has a sure fire plan that will reap good return on your rather small investment. He then goes to the casino, blows it all on the slots, and never pays you back. A couple months later, he asks you for $500 because he's down on his luck. You give him the benefit of the doubt and give him the money. He promises he'll give a good return on your investment, but he blows it on lottery tickets. Your buddy comes back in another couple of months and asks for $1000. He's screwed you twice already. Are you going to risk giving him the money? Of course not. It's a bad investment. This is pretty much how GM et al have been acting when they go to the various governments hat in hand. They ask for money promising we would reap big rewards in the future, we give it to them, and they do nothing with it.

Most of the Big Three's problems were caused by mismanagement. Ten years ago, analysts were predicting we'd see a huge spike in oil costs in the coming years. Honda, Hyundai, Toyota, and Volkswagen looked at their line up and began producing ultra-fuel efficient vehicles when everyone else was churning out SUVs and minivans by the train load. The Americans were betting heavily on $0.60 a litre gas would be here to stay. Then in 2005, it happened. Hurricane Katrina bumped oil prices up to an astounding $1.30 per litre. The American auto makers claimed that was just a spike. Then in 2006, gas prices broke the psychological $1.00 litre barrier and stayed there. Large, gas guzzling SUVs with 70 litre tanks were becoming prohibitively expensive to operate, yet the Big Three still kept churning them out at faster and faster paces. SUV sales started to decline. The Big Three responded with the crossover, which was essentially an SUV that wasn't as tall. Nobody bought them. 2008 marked the final nail in the coffin when gas prices rose over $1.30 in Canada and stayed there. Nobody could afford to fuel their large vehicles. Sales of fuel efficient small cars skyrocketed while SUV and minivan sales plummeted. American automakers barely scraped past the first fuel crisis in the 1970s after years of betting on cheap gas. However, that was an event that could not have been foreseen years ahead. Everybody saw the 2008 fuel crisis coming, everyone except the Big Three. Gas prices have dropped dramatically, as they usually do at this time of year. The long term trend however is sill going up. We will most likely see $1.30 prices return by next summer. What have US automakers done to address this? Absolutely nothing. GM and Crystler's big solutions to save Canadian auto jobs was to build the new Camero and Challenger in Oshawa and Brampton respectively. Both are gas guzzling muscle cars that only appeal to a niche market. Employees currently at the plants are overpaid and underworked, which has led to mass layoffs. They don't get off the blame entirely since the CAW has extorted these exorbitant pay rates and benefits from the company, but it still all boils down to mismanagement from the top.

This is precisely why we should not give the industry more money, despite the number of jobs that are at risk. The auto makers might as well be crown corporations at this point due to the amount of tax payer money that has gone into them. We keep handing over the dough but the industry does absolutely nothing with it other than maintain the status quo. The status quo does not work any more in today's world. Giving them more money is akin to trying to stop the Titanic from sinking by attempting to plug the hole with your finger. These companies are still bleeding red ink despite our best efforts. Bailouts are necessary in rough economic times as dictated by Keynesian economics. However, when you keep giving your buddy money to help him out, and he wastes it, there must come a point where you have to say "no more." Perhaps if faced with extinction, the American automakers might finally be forced to innovate, rather than churning out products nobody wants and spending other peoples' money like water.