Possible $40-50 Billion for the Big Three Auto Makers

I felt a little switch go off in the back of my mind as I read the title of this article this morning: “Big Three Auto Makers Seek More Help From Washington“. The article goes into detail about the $25 billion government backed loan package the three American vehicle manufacturers are to receive and the expectation that this will soon balloon to $40 to $50 billion. Notwithstanding the huge amount of money this represents, it also reminds me of the phrase ‘do as we say, not as we do’.

You see a few short weeks ago, a U.S. trade official confirmed that they would be investigating the funding provided to Bombardier by the Canadian and British governments to develop and build the C-series commercial aircraft. The WTO has regulations that prevent companies from receiving undue competitive advantages from government sources. It is also important to point out that receiving funding or tax incentives from federal, provincial/state or municipal governments is certainly not illegal. However, it must be proved that these incentives are given with the expectation of some return. In the case of Bombardier, that would come in the form of design centres and production/assembly facilities, which in turn produce jobs and revenues for the area.

The bail-out of the big three car makers in the U.S. is more about restoring their competitive advantage in the global marketplace than anything else. After several quarters of huge losses, GM, Chrysler and Ford are all feeling the strain of little resources to design and produce the next generation of vehicles. But the position they’re in is mostly of their own design, ramming bigger and more fuel hungry engines into their vehicles while the Japanese and Korean makers have focused on efficiency. When the tide turned, it was that bad business decision that crippled them. To bail them out for the wrong business decision seems absolutely wrong, and certainly on a different scale altogether compared to Bombardier’s funding, which actually creates a net positive effect on regional revenues and jobs, as opposed to simply keeping the status quo in the case of the big three bailout. Furthermore, the aid package is designed to allow the three car makers to increase research and development funding for creating more fuel efficient vehicles, in order to better compete. Now tell me that isn’t a textbook case that the WTO should be investigating.

But the situation isn’t that black and white. With the economy already in a precarious state, the last thing the U.S. government would want is a very, very large part of the manufacturing industry imploding, which is exactly what would happen if either of the big three were to go belly up. The point I’m trying to make is that it’s simply laughable to be pointing fingers at others when your own backyard is in disarray.

I normally like to stay away from geo-political issues, but this topic has a healthy serving of business and economics as well so I thought it appropriate.

3 thoughts on “Possible $40-50 Billion for the Big Three Auto Makers”

  1. I’m generally not an advocate for the free market, but in this case it seems like it is time for american auto-makers to open up their eyes and stop flooding the market with giant SUVs and big engines simply because the head engineer thinks they’re more “macho” (or something equally inane).

  2. If the three American carmakers are in such dire economic straits that survival depends on massive governmental loans, they have only themselves to blame. Toyota and Honda manufacture dependable, fuel-efficient cars, were first to offer gas/electric hybrids, and never received bailouts. Detroit, on the other hand, recently sought maximum profits by selling inefficient, oversized ego vehicles as if the price of gas would never go up. And instead of spending those profits on research and development to invent better engineering, they lobbied Washington to delay mandated rises in average fuel efficiency. But now that the price of gas ranges between $3.50 to $4.00 per gallon, Detroit’s profits have mysteriously vanished, dealers across the country are stuck with lots full of unwanted SUV behemoths, and the Big Three beg for pity.

    Forget loans from the U.S. Treasury — Chrysler obviously learned nothing from the one it famously received. Instead, let Darwinism and the marketplace sort things out. If Chrysler, Ford or General Motors can’t adapt on their own, they can join Hudson, Nash, Packard and Studebaker in the museum of obsolete American car companies.

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