Who Needs a Bailout? The Auto Industry?
Ever since the government bailed out the banks, it seems that Washington has installed a “Bailout Line Forms Here” sign in Washington. Within days of passing the banking bailout, there was already talk of the auto industry wanting their share too. The question now is, who really needs a bailout? Or better yet, who should get a government bailout? Since the auto industry is first in line, should we move forward and get them out of a bind?
First, let’s take a look at why the US auto industry is in the mess they are currently. This isn’t a very difficult question to answer. It’s actually quite simple. They are no longer building cars that people want to buy. The big three are very short sighted and arrogant in the way they operate. This has been very evident over the years as the US automakers struggled to adapt to market shifts such as the gas crunch of the 70′s and competition from higher quality imports in the 80′s. Most relevant to the recent economic mess is the complete mismanagement starting in the late 1990′s. From the start of the 90′s, the big three were making good inroads in competing with their international counterparts. Quality was on the rise and some of the nation’s best sellers were domestic makes. Who can forget the heyday of the Ford Taurus? Heading into the late 90′s, market demand started to shift towards SUVs and Detroit was ready to capitalize. Sales of Explorers, Blazers, and Durangos whet through the roof. GM brought the Hummer to the consumer markets and started a new fad in opulence. However, they made a fatal mistake. Upper management bet the bank on this market trend and they put all their eggs in one basket. They sank big money into the development of new SUV and truck lines and all but neglected the rest of their lineup. In hindsight, this was an amateur mistake that should have never been made.
But how was the auto industry to know that oil prices would soar and the public would turn their back on gas guzzling SUVs? Simple. The writing was on the wall. The big three dodged a bullet in the late 70′s and all indicators were saying that oil would not be cheap forever. You have to position your company to take advantage of market swings. This means keeping up with your entire product lineup. Ford, for example, neglected their family car line in exchange for a focus on the Explorer and other SUVs. As a result, the Taurus suffered, Ford fell out of touch with this market segment, and the Camry and Accord rocketed ahead. Toyota and Honda kept up with their complete vehicle lineups, from small cars to large. As a result, they not only benefited from the SUV boom, but they were ready with small cars and fuel efficient vehicles when gas prices hit consumers in the pocketbook.
It took a second gas crunch for the big three to finally get it. But did they really get it? There is a renewed interest inside of Detroit to make fuel efficient vehicles. Ironically, prices at the pump are now on the decline. GM has the new Volt on the horizon, but has already announced plans to discontinue the TrailBlazer. Likewise, the future of the Explorer is in doubt. While they learned that they should be advancing in small cars and high MPG, they didn’t seem to realize that they need to have a comprehensive lineup. Just because market demand has shifted to fuel economy, doesn’t mean that there aren’t still people who need an off road SUV. Ultimately, with cars like the Dodge Caliber, Ford Flex, and the new Taurus filling the rental car fleets, Detroit has proven how out of touch they are with US consumers.
Sure, the US auto makers have dug their own grave, but are they completely to blame themselves? The government has certainly put a lot of pressures on the industry over the years. Washington has felt it their duty to drive the industry. The CAFE law has forced the big three to spend billions on development and R&D in what may or may not be a realistic time frame. Normally, consumer demands will be a driving force behind automobile development. Now that we have seen $4 a gallon gas prices, it’s rather obvious that consumer demand will take care of itself and there will be a natural trend towards better MPG across the industry. The government has put undue and artificial pressure by regulating the industry. Not only is this true with the CAFE law, but numerous environmental laws over the years have taken their toll on the industry. They may have been for the green good of society, but someone always has to pay the piper. Anytime consumer demand is not allowed to completely drive the direction of the industry, there will be negative consequences to pay.
So does all this warrant a bailout? On one had, maybe the auto industry deserves it. The government as certainly interfered in their business and can be held partially to blame for their fall. Shouldn’t the government own up and help them out? After all, the banking bailout has been all but a failure so far. Instead of filtering the money out to the economy and those in need, the banks are sitting on the money and using it to buy other banks. An auto industry bailout would at least get the gears of industry turning again. The big three provide jobs by the thousands and a bailout would certainly make sure money continues to head in that direction. It would spark the economy and flow through the numerous supply routes tied to the auto industry. If anyone should get a bailout, shouldn’t the auto industry?
On the flip side, bailouts in general are a bad idea. A free economy thrives off of failure as much as it does success. Good business decisions are rewarded while bad decisions result in closure and bankruptcy. A government bailout of the auto industry (as well the financial industry) sends a bad message to the economy and creates a dangerous tie between business and government. Bailouts are directed at and support the “big guys” while small businesses are left to fail and/or support the bailouts through increased tax burdens. Innovation is effectly stiffled. America is already creating a bad trend of keeping dying industries afloat through legislation (need I mention the music inustry?). We are taking perilous steps away from free economy and twards a strange hybrid economy where government and business is connected at the hip. The consiquences of this are unknown, but trends seem to indicate the results will not be positive for consumers and citizens. We need to let failed businesses crash and burn. Yes, it will be painful to let Detroit’s automakes go under and, more than likely, the pain will be felt throughout the international auto industries. However, from their ashes new car companies will arise. These companies will be smaller, greener, and more agile. Don’t believe me? The seeds of these companies have already been planted, but the shadow of the big three have kept them from growing.
