By Robert Dozortsev
Last week, General Motors CEO Rick Wagoner publicly announced that his company will need $25 billion to stay afloat. This announcement was made around the same time as their third-quarter results came in at a whopping loss of $5 billion.
Since Wagoner's statement, many economists and politicians have argued whether bailing out the "dinosaur" of a company is necessary. Obama and a majority of Democrats are behind the idea of a bailout for GM, which may turn out to be the outcome's biggest factor.
Opposition has said that airline companies such as Delta, Northwest and Continental all achieved successful results soon after filing Chapter 11 bankruptcy, so why shouldn't GM follow suit? The answer is that apples and oranges cannot be compared. Airline companies do not actually have any product, only a service. GM, on the other hand, has a problem creating a competitive product as well as managing it.
Warren Buffet said several years ago, "Rick Wagoner and Bill Ford have both been handed, by past managers, extremely difficult hands to play. These are not the consequences of their own doing, but they have inherited a legacy cost structure, with contracts put in place decades ago, that make it very difficult for them to be competitive in today's world."
GM is plagued by healthcare costs that must be provided to retirees and current employees, which adds over $1,500 to the price of every vehicle they sell. This bailout, in fact, becomes not a question of "if," but of "when." If GM is not bailed out now, all of the people that were supposed to receive benefits will have to ultimately be paid for by the government.
If GM is left to fend for itself, this will mean the loss of 340,000 jobs directly, and about 2.2 million jobs indirectly at parts and tools manufacturers. Michigan's auto industry has already been in a slump for several years with about 12 percent unemployment and the city of Detroit faces a budget deficit of $200 million for 2009.
Obama made a statement, saying: "For the auto industry to completely collapse would be a disaster in this kind of environment, so it's my belief that we need to provide assistance to the auto industry. But I think that it can't be a blank check." This means that the money would have to have many clauses and strings as to how they would be spent. A concern is that the money will be misspent within the white collar sector and it will be misused.
Many are looking for Wagoner to really make a statement about his commitment to the company other than economizing. A good example for him is Lee Iacocca, who made his salary $1 and cut other high paying positions by 10 percent when Chrysler got a government loan in 1980.
So what comes after fixing the white collar jobs and healthcare? The aspect of making American made cars desirable again. In the last decade, American car manufacturers have fallen behind their international competitors in terms of technology, efficiency and quality because they have been spending so much money on the benefits of their employees. The government also offered a separate $25 billion loan package in September for the purpose of catching up with competitors.
The reason that the American automakers have fallen behind is because of the emphasis on marketing and the subsequent decline of money spent on actually improving the cars. The way the car looks and the euphoria the marketing campaign creates is the basis for the sales of American cars.
Not only should the second $25 billion loan proposal be used to restructure but also to balance the currently disproportionate marketing sector with the engineering sector. The second loan package has some strings attached that will hopefully generate a more fuel-efficient line-up of cars.
For most of the 20th century, America has ridden on the coattails of its automakers. It is a crucial time in which we must now return the favor. If GM files Chapter 11 bankruptcy, 2 percent of Americans will become unemployed. With the unemployment rate at 6.5 percent now, our crash will be worse than the panic of 1929. Americans will be lost amidst a credit crunch, automotive industry crash and unemployment if the government does not lubricate our Motor City.
Robert Dozortsev is a freshman accounting and marketing
student. You may e-mail him at rdozor1@pride.hofstra.edu.