It was bound to happen. In this “Year of the bailout,” why shouldn’t Detroit get into the act? The financial community has maintained a death-watch over GM and Ford for months as they hemorrhage floods of red ink. Bankruptcy is viewed more as a matter of “when,” not “if.”
On August 5, John Dingell, the powerful Michigan congressman whose district lies in the heart of “Big Three” country, acted. Dingell has proposed a government “loan” of $25 billion to the Big Three, ostensibly to speed up the transition to manufacturing alternative-fuel cars.
Question: If it’s just a lack of capital that is preventing the Big Three from making the transition to a profitable future, then why aren’t private, profit-seeking lenders issuing loans to them? For that matter, since the stock prices of GM and Ford are so depressed that the two companies combined are priced at less than $17 billion, then why doesn’t some deep-pocket value investor like Warren Buffett just buy them?
The reason nobody in the private sector wants to invest in GM or Ford, or to buy privately owned Chrysler, is that their business models aren’t viable. Their cost structure—particularly their cost of labor—is prohibitively expensive. The consensus is that, regardless of what kind of fuel their cars use, the Big Three simply can’t compete with lower-cost producers. Cars can be profitably made in the United States with labor compensation packages in the $40-$50/hour range (Honda, Toyota, and Nissan have demonstrated that) but not when labor legacy costs and compensation packages total over $70 per hour, as they do at GM.