GM and Chrysler returned to Congress yesterday to submit their turnaround plans and –since they were in the neighborhood– ask for more federal loan money. Specifically, GM said they could run out of cash to fund their operations next month without federal assistance.
In December, Congress gave both companies the homework assignment to draw out a road map to sustainable profitability. Those plans, revealed yesterday, involve dramatic cost-cutting measures including massive layoffs, shutting down plants, and eliminating brands and vehicle models from their lineups. All of those actions are necessary to deal with the new reality of the new-vehicle marketplace: the sales volume isn’t there anymore. The industry-wide sales pace has gone from 17 million vehicles in 2006 to 10 million today. Every major manufacturer is down 30%+ compared with their prior year sales. Yes, even Toyota and Honda.
While giving GM and Chrysler more federal loan money may be the most cost-effective jobs program in the near term, it does little to ensure the long-term viability of either company. The turnaround plans submitted did not address one critical component of profitability: revenue. GM and Chrysler didn’t reveal anything on how they planned to sell more vehicles, gain market share, or make more profit per copy. Until they figure out how to make cars customers truly want and are willing to pay for, any more federal money just delays the inevitable. And based on what I’ve read so far, their game plan for doing that wasn’t included.
Private capital sees GM and Chrysler as too risky to lend money to. Banks and investors, whose only job is to take calculated risks to get a return on their money, have decided “No, it’s not worth it.” Would the government, saying “Yes, cut the check,” be a responsible steward of our tax dollars? Look at it this way: John Doe wants to buy a house but has terrible credit. Based on his terrible credit history, no bank will lend him the money. John asks the government for the loan. Knowing they’re unlikely to get paid back, but assigning high intrinsic value to helping John “achieve the American Dream,” the government writes the mortgage.
My fear is that there’s really not that much difference between GM and Chrysler, and John. (Aside from the massive impact the companies have on our nation’s industry, employment, and economy — discussed next.)
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