Should the Big Three Be Allowed to Fail?

By Olivier Garret, CEO, Casey Research

The fact that after over 30 years of consistent mismanagement and decline, there is still any discussion on whether or not we should allow the now significantly smaller “Big Three” automakers to fail is clear evidence that Washington has lost all common sense.

Why, when after more than three decades of continuous restructuring, GM, Ford, and Chrysler have not been able to change their culture, high-cost basis and ill-conceived strategies, does anyone believe yet another break would change anything? Are they going to be better off next year, or the year after that, or even five years from now? Just because their situation has become even more precarious, it doesn’t mean that they will be more successful going forward… more likely the opposite.

“The definition of stupidity is doing the same thing over and over again and expecting different results,” said Albert Einstein.

The best thing that could happen to the auto industry is the Big Three filing for bankruptcy protection. As a former turnaround professional, I am convinced that the tools afforded by the bankruptcy courts would allow these companies to restructure dramatically, thus allowing them to renegotiate and drastically lower most of their liabilities. Management would be overhauled, pensions renegotiated, union agreements tabled and made more flexible. Everything that these three companies have attempted to do for years, and could never achieve, would now be possible.

So, why in the world is management siding with the unions in their appeal to Congress?

Because under bankruptcy protection, management becomes accountable to the court, many of their perks and benefits would be curtailed, and they could, heaven forbid, even lose their jobs.

The auto industry, its unions and allies are therefore quick to point out that they, too, are “too big to fail” (have we heard that before?), that the American economy would not recover from the job losses and the economic impact of failures that would have far-reaching implications.

The Center for Automotive Research (CAR) has just released a comprehensive study on the impact of a 100% failure of the Big Three in the U.S.:

• In the first year, the U.S. economy would lose 3 million jobs (about nine additional jobs for each auto worker that is laid off). It would lose another 2.5 million in year two and 1.8 million in year three.
• U.S. personal income would decline by over $150 billion in the first year and another $250 billion in the next two years.
• Our government would also lose $60 billion in 2009 and almost another $100 billion in the next two years.
• We would lose a piece of Americana (those of you who are nostalgic for the good ol’ days might enjoy the following video clip.)

I agree – it poses a very grim scenario. Read more….