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12.01.2008 0

The Bigger They Are

  • On: 12/04/2008 10:08:15
  • In: Economy
  • By Robert Romano 

    The bigger they are, the harder they fall.

    When the Big Three came in for loans last month, they had asked for $25 billion, which was rejected. This had come on top of $25 billion in loans from earlier this year, and had not been accompanied by a new business model.

    Their latest request as of yesterday was $34 billion for new loans.  But that is just the beginning.

    Upon request by Congress, the companies have submitted what they allege are plans to return the companies, GM, Ford, and Chrysler, to profitability by, they say, 2011.

    Color us skeptical. By their own admission, if auto sales do not turn around rapidly in the New Year—under a worst-case scenario—the costs will be significant. In other words, the Big Three will be back for yet more “loans”, which if the companies do not return to profitability, will never be paid off.

    But believe it or not, it gets worse. These “plans” are largely dependent upon a broader economic recovery occurring within two years. While the current downturn will assuredly end at some point, it looks to get much worse before it gets better.

    Therefore, expect $34 billion to grow to a much larger sum should Congress now proceed to pour more funds into what some have described as a bottomless money hole.

    Automakers and the UAW have claimed that since they did not personally cause the current economic dire straits, they should not be made to suffer as a result of it. But if a business model does not provide for the contingency of an economic slowdown or recession, that must mean it has inherent costs that are weighing it down.

    And there is no shortage of those. The legacy costs—paying for the retirements, health, and other benefits the UAW has extracted from automakers—that go into building cars in America by the Big Three are indeed quite significant: They are unsustainable. And if they cannot be addressed now to prevent the companies from becoming insolvent, then bankruptcy truly is the only option.

    The Big Three argue that nobody will buy a car from a company that is going through bankruptcy, and if that is the case, it is very likely that the companies’ assets will have to be sold off. New companies would eventually emerge that are capitalized by private investment. It may be that, at the end of the day, there is no GM. There is no Ford. There is no Chrysler.

    These automakers, even with their history, are not iron-clad institutions. Nothing lasts forever. And if they cannot adapt to compete with companies like Toyota or Honda that can build their product for far less a cost, then they are not “too big to fail.”

    They are too stubborn to succeed. They are fossils. They are obsolete. And then they must be allowed to fall.

    Robert Romano is the editor of ALG News Bureau.

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