Can someone please shoot GM and Chrysler in the head?

by philg

Every time GM and Chrysler are in the news, the stock market crashes (S&P down 3.5% yesterday). The companies contribute little to U.S. GDP, nothing to U.S. GDP growth, and nothing to U.S. corporate profits, the basis of value in the S&P 500. If G.M. and Chrysler were to disappear and dynamite their factories, the remaining domestic auto plants (Ford, Toyota, Honda, Nissan, Mercedes, BMW, et al) could produce sufficient quantities of vehicles to satisfy current and expected demand. GM and Chrysler had only about a 30 percent combined domestic market share and demand for vehicles is down by more than 30 percent.

Had GM and Chrysler reorganized under Chapter 11 last fall (see my November 8, 2008 posting) investors wouldn’t be constantly reminded of these American failure stories, emblematic of our nation’s decline into special-interest squabbling (see Mancur Olson). The companies would be out of Chapter 11 by now with greatly reduced liabilities, lower costs, and similar levels of production. We could have news stories about growing software, energy, and biotech companies.

Here’s how an investor reads a story about GM and Chrysler:

  • U.S. executives, despite being paid 5-10 times as much as counterparts in Japan and Europe, do not produce better products, profits, or investment returns (when Mercedes took over Chrysler, it turned out that the CEO at Mercedes, a much larger and more successful company, earned less than dozens of Chrysler managers)
  • U.S. labor laws and unions will eventually strangle a manufacturing company, resulting in a 100 percent loss to shareholders
  • the U.S. health care system, with its critical shortage of doctors per capita and Kafka-esque administrative procedures, can become enough of a burden on an employer to render its products uncompetitive
  • taxes in the U.S. will eventually become the highest in the world as the country continues to prop up its least competitive industries
  • a lot more mortgage-backed securities will become worthless as these companies close factories and workers abandon houses

Is that investor in a mood to buy an American stock? Build a new factory here in the U.S.? Make a venture capital investment?

We would be better off shooting these companies in the head simply so that we could get on with economic life here in the U.S.

[Let me repeat what I said five months ago: “The government has already done everything that it needs to in order to help G.M. The government established bankruptcy courts so that a company like G.M. can go through a Chapter 11 reorganization. During the Chapter 11 process, a judge has the power to adjust the company’s obligations so that they can be paid from the company’s likely future revenue. Chapter 11 was designed specifically so that employees can keep their jobs, albeit possibly at lower salaries, while shareholders and creditors suffer and/or are wiped out.” G.M. and Chrysler are poster children for Chapter 11. They have some good assets and some crushing liabilities. Chapter 11 was explicitly designed to preserve jobs while wiping out shareholders and punishing bondholders.]

5 thoughts on “Can someone please shoot GM and Chrysler in the head?”

  1. GM and Chrysler had only about a 30 percent combined domestic market share and demand for vehicles is down by more than 30 percent.

    And getting worse. According to Megan McArdle quoting the recent administration report, it’s even lower for GM:

    GM has been losing market share slowly to its competitors for decades. In 1980, GM’s US market share was 45%; in 1990, GM’s US share was 36%, in 2000, its share was 29%. In 2008, its share was 22%. In short, GM has been losing 0.7% per year for the last 30 years.

    If you haven’t read David Halberstam’s The Reckoning, you might want to: it essentially describes today’s world, but was published in ~1986. I just did and posted thoughts here.

  3. Nate Silver of FiveThirtyEight has a graph showing GM’s operating margin over the last 50 years. He suggests that GM’s shortsighted decision to give lower salaries in exchange for generous retirement benefits is what’s really killing them now. Silver:

    The retirees might have benefited from GM’s short-sightedness — but they also worked hard Monday through Friday every week of in expectation of receiving the benefits that GM had promised them. From the standpoint of fairness, it would be much better to require GM to take the hit — but there isn’t much of GM left to punish, as its outstanding retiree obligations exceed its market capitalization many times over, and as the decision-makers who led GM into this position left the company decades ago. Today’s employees at GM, and the unions that organize them, likewise don’t have anything much to do with the problem — most of the excess costs it requires to produce a Buick versus a Toyota come in the form of legacy costs, not what those employees are receiving in salary and benefits today.

  5. Russil: Thanks for the links. But as I’ve noted in earlier postings, why is it the job of citizens and politicians to worry about this one company? We pay bankruptcy judges who have seen thousands of company like GM (liabilities exceeding assets). These judges are the world’s best qualified people to determine what changes must be made to enable GM to continue operations.

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