The million dollar question (or shall I say the multi-billion dollar question) that needs to be answered now is should the American government bail-out the Big Three Detroit automobile companies? Ford, GM and Chrysler have asked for American tax-payers’ monies to help them through these difficult times. At one point in their retracted negotiations with the American Senate and Congress they were asking in excess of US$30 billion in aid! Mark Zandi, the economist, predicts that the total rescue package could be up to US$125 billion! Many feel that the automakers will in the end be making 4 trips to Washington with each trip costing tax-payers close to US$30 billion.
My take is this : These 3 behemoths need to be saved but before I put forth my argument in support of them, allow me first to categorically say that I am also not fooled by their arguments to tap into government largesse. I suspect many other observers will say the same.
Firstly, these companies’ troubles did not begin with the sub-prime crisis or during this latest round of economic downturn. They have been going down-hill this past one decade and they didn't do a damn thing about it. Actually they did quite a few things…but for all the wrong reasons. GM sells close to about a million vehicles per year in China alone; but that don't seem to translate into anything more beneficial to its overall financial health. They have been loosing market share to their Japanese competitors for years. Their products were continuously lambasted by consumers for their lack of quality and innovation. They produce petrol guzzling monsters in an age where discerning consumers are desperate for fuel-efficient and environmentally friendly cars. On top of that these car makers had so many models in any particular range that they began to cannibalize each other. Till today, I wonder why is that Suzuki had the foresight to set up base in India and wait for the country to grow and reap the benefits. Why didn’t the Big Three think of that? With so much Indian connections in their skilled workforce, the Americans could have very easily leveraged on this to venture into the Indian market. They didn’t but the Japanese and Koreans have done so. This is a prime example of how, like many other too-big-to-fail companies, these car makers still think like their country-men in the deep south : That the world revolves around America! Well, it doesn't. American manufacturers can’t depend ONLY on their domestic markets AND they have to open their markets to others. That was what they preached to the world – Open market, un-hindered capitalism, etc. Can we say that the rest of the world has learned the lessons too well while America it self forgot what it was preaching? But I digress…
Secondly, by the American government pumping in billions of tax payer monies into their coffers, they are not going to be doing any better three years from now. While this may help them to avoid from filing for bankruptcy, the longer term viability of these companies will still be in doubt. They need to make some fundamental changes to the way they build and sell cars. In fact, they have to revamp their business model. The Big 3 is probably too big for America. They may have to seriously consider a merger between them. Why acquire/merge with a German car maker when you have enough merger possibilities on your own shores?
Here is why I think the Big Three should be saved. If they go under, they will bring many others with them; particularly their serpentine connections of supplier companies. This is a fear already voiced by their Japanese competitors! The thing about the car industry is that the small side-view mirror maker in Alabama or Shah Alam is the same guy who makes for two or three other car makers. So, if one as big as Ford or GM collapses, he will have to wind-up and create a big mess for his other clients. If Toyota faces problems in the US, which is already facing the lowest car sales in 26 years, the ripple effect can be felt all the way to Thailand and other parts of South East Asia where it has considerable presence. The world is connected remember? Already the Big Three Japanese car makers, Toyota, Honda and Nissan has drastically lowered their earning projections. Nissan has in fact been reducing its production output since 2007. More than the American companies, their Japanese counterparts are what we should worry about in this part of the world. If the Japanese, as an extension of the problems they face in the USA vis a vis their close ‘connections’ to the Big Three there face the prospect of further reduction in their investment and production, this part of the world will suffer the greatest. I shudder to think the impact this will have on Thailand for example. Although, I suspect it may be a blessing in disguise for indigenous car companies in the region, especially Proton. But then again, this may be short lived.
But, I am still a little puzzled about how these companies are going to manage government interventions. Ford, for example, is still a largely family owned company while Chrysler is owned by an equity firm (if I am not wrong). How accepting public money is going to change the ownership of these companies still remains to be seen. Surely the American government is not going to just give billions away on a silver platter?
But then…...in America…..any thing is possible.
No comments:
Post a Comment