Why the bailout will kill good business

posted at 11:04 am on January 13, 2009 by Ed Morrissey

Ford separated itself from the other two major American carmakers by refusing to take part in the federal bailout of the industry from the White House and Congress.  Instead, they hoped to build a stronger customer base by standing on their own two feet and providing better product.  Has it worked?  Yes and no.  While Ford has increased market share and built sales, the government bailout will wind up subsidizing their competitors and damaging their business:

At a time when GM’s and Chrysler’s financing arms have been hard-pressed to make loans to potential buyers, Ford has been using television, online, and radio ads to remind the world that it has money to lend. And executives have been falling over themselves to promote Ford’s kudos from Consumer Reports, which this month noted that of eight new Detroit cars it recommends, six are Fords or Ford brands.

Is the PR offensive paying off? Ford says it is. In a dismal fourth quarter, it notes, only Ford, Honda (HMC), and Toyota increased their market share among the top six carmakers. Ford surveys, says a company insider, show that when consumers are asked about Ford as part of the Big Three or the Detroit Three, they “express pessimism, concern, and lack of confidence.” But when the questions center on Ford alone, this person says, confidence shoots up—”and not just by a couple of points.”

Ford’s audience isn’t only consumers, of course. Mulally’s request for a credit line rather than loans has left lawmakers and the union believing Ford is stronger than its rivals. To a degree, that’s true, partly because two years ago, Mulally raised $23 billion in new money and credit lines. But Ford also has $26 billion of debt—$19 billion of it unsecured—and for six months has been burning through cash as fast as GM. Mulally is understandably eager to retain Ford’s independence by paying its creditors in full. But GM, in exchange for federal help, likely will swap equity for debt and may emerge with a stronger balance sheet. By taking the high road, Ford could find itself at a competitive disadvantage.

Ford did more than just offer credit.  They have improved their product, introduced cutting-edge technology, and built the kind of efficient vehicles the incoming Obama administration wants.  The pricing is still not as competitive as it needs to get against Toyota and Honda, but Ford has moved in all the right directions — and they have built buzz in the car industry which they hope to convert to better sales.

And after doing all of that, the government plans to restore the credit of the two companies who have not succeeded in improving their product or their sales.  This is what is wrong with government bailouts of private enterprise at their core.  They subsidize failure and penalize success.  The government will wind up distorting this market just as surely as they did the housing and lending markets, pushing Ford to the side as GM and Chrysler get a head start on their domestic competition.

Instead of picking winners and losers, and of burdening manufacturers and other markets with social-political engineering like CAFE standards, Congress should butt out and let private enterprise fend for itself.  Only when the Congress ex machina ceases to exist will the stakeholders in the auto industry — management, labor, and suppliers — start negotiating in earnest to rescue their own pocketbooks.  Now, though, that healthy process ends up being a “competitive disadvantage” to subsidized competition.


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Right. Same goes for the banks. Let the dopes and shysters go out of business, and make room for better competitors.

james23 on January 13, 2009 at 11:09 AM

These bailouts help everyone except those who conduct themselves properly.

drjohn on January 13, 2009 at 11:09 AM

Doing the right thing gets you a “competitive disadvantage”.

Like paying off your mortgage, living within your means, not overspending on the credit card, paying for your healthcare– all for squares and suckers.

JiangxiDad on January 13, 2009 at 11:09 AM

No one without business experience in Congress ought to be deciding anything about the economy.

Those idiots gave out the first “stimulus” checks to everyone except for those who would actually spend the money.

It is difficult to express my contempt for them.

drjohn on January 13, 2009 at 11:11 AM

JiangxiDad on January 13, 2009 at 11:09 AM

AND tuition, which this year is costing me over $100,000

drjohn on January 13, 2009 at 11:12 AM

Of course bailouts hurt good businesses. As an emergency measure to push the issue down the road–it is questionable at best. Any more money has to involve something, concessions from the Unions, or it is a waste.

Mr. Joe on January 13, 2009 at 11:12 AM

Yep…let them fail and stop these bailouts.

becki51758 on January 13, 2009 at 11:12 AM

Can I start up a crappy car company and get a bailout?

I’ll make shoddy cars nobody wants, employ overpaid union featherbedders and hopelessly screw up distribution.

I’m going to be a billionaire! It’s the American dream.

NoDonkey on January 13, 2009 at 11:13 AM

Can we apply this to states too? I can’t be the only one unhappy with the idea of using federal money to bail out that disaster California.

Still, I’m not buying domestic vehicles again until the unions are thumped into line with reality.

Bishop on January 13, 2009 at 11:13 AM

They are still going to be in trouble as long as they allow themselves to be extorted by the existence of the UAW.

Count to 10 on January 13, 2009 at 11:13 AM

The worst run entity in the country is our government. But of course they will bail out (with our money) other horribly run institutions.

It’s professional courtesy.

Sugar Land on January 13, 2009 at 11:15 AM

My last car was a Buick but the next one might just be a Ford.

Yakko77 on January 13, 2009 at 11:15 AM

NoDonkey on January 13, 2009 at 11:13 AM

No, you are not one of the chosen companies that has been deemed bailout-worthy by the government.

lorien1973 on January 13, 2009 at 11:16 AM

The problem is that it has to kill good business, otherwise the gov won’t get it’s money back.

the_nile on January 13, 2009 at 11:17 AM

No, you are not one of the chosen companies that has been deemed bailout-worthy by the government.

Dammit.

Is it too early to make a contribution to Barry’s re-election campaign?

I’m willing to work hard, here.

NoDonkey on January 13, 2009 at 11:17 AM

The worst run entity in the country is our government.
Sugar Land on January 13, 2009 at 11:15 AM

As it should be. I dread the idea of a country where an institution is allowed to exist if it is run worse than government.

Count to 10 on January 13, 2009 at 11:18 AM

I’m still waiting for MY BAILOUT…with it I promise to get a collection of cars…classic mostly…which will in turn help the auto business…

a BUGATTI in every garage…..

right4life on January 13, 2009 at 11:19 AM

Right. Same goes for the banks. Let the dopes and shysters go out of business, and make room for better competitors.

james23 on January 13, 2009 at 11:09 AM

The only caveat to that is if the Government put restrictions or forced the banks to do something that caused them to go bankrupt.
That is where this gets messy. If you force, let’s say a car company to meet certain standards and obtaining those standards makes them bankrupt…who is at fault?
So they build the “electric car” and no one buys it…all the R & D, all the marketing, all the production, lost money.
And remember, if they lose $5, they have sell $100 (or more) to make up for it.

right2bright on January 13, 2009 at 11:20 AM

Is it too early to make a contribution to Barry’s re-election campaign?

I’m willing to work hard, here.

NoDonkey on January 13, 2009 at 11:17 AM

Now we’re getting somewhere, with that kind of bipartisanship it shouldn’t be a problem.

the_nile on January 13, 2009 at 11:20 AM

Yakko77 on January 13, 2009 at 11:15 AM

Go ahead and treat yourself to the greatness that is the F-150!

gator70 on January 13, 2009 at 11:22 AM

American cars were and are still made after:

American Motors (of Pacer fame)
Studebaker-Packard
Crosley

amongst others…

Capitalism and free market economics requires allowing the weak to fail so that the strong can be rewarded.

When you make it so that failure is impossible, success also becomes impossible. The end result of these bailout will be Detroit will be producing “Trabants” (look them up) and Americans will be buying cars (if “Dear Leader” Obama allows it) from countries that still practice free market economics.

A free market always produces a superior, cheaper product than a socialist one that lacks “profit or die” incentive.

wildcat84 on January 13, 2009 at 11:22 AM

They’ve done this very same thing in the ag business. Subsidize failure & penalize success by forcing people to accept the handout subsidies by distorting the markets.
If you don’t play, you get no pay. The cattle industry has started getting into these environmental subsidies like selling ‘carbon credits’ & partaking in CRP-like programs which drive up cash rent prices i.e. I can’t compete with govt payments, so I can’t rent pasture land.
Govt intervention screws EVERYTHING up.

Badger40 on January 13, 2009 at 11:23 AM

Now we’re getting somewhere, with that kind of bipartisanship it shouldn’t be a problem.

I knew we could find common ground.

Hope and change.

How big does this check need to be and (completely unrelated of course) how big will my bailout be?

And how about those ChiSox?

NoDonkey on January 13, 2009 at 11:25 AM

They’ve done this very same thing in the ag business. Subsidize failure & penalize success by forcing people to accept the handout subsidies by distorting the markets.
If you don’t play, you get no pay. The cattle industry has started getting into these environmental subsidies like selling ‘carbon credits’ & partaking in CRP-like programs which drive up cash rent prices i.e. I can’t compete with govt payments, so I can’t rent pasture land.
Govt intervention screws EVERYTHING up.

Badger40 on January 13, 2009 at 11:23 AM

These are the kind of things that I think Atlas Shrugged highlighted well (but only in parts one and two–part three is just an apocalyptic rant promoting an upside-down version of Marxism/Leninism with John Gault as the second coming).

Count to 10 on January 13, 2009 at 11:29 AM

This is akin to the government and banks (which they now essentially own) reworking mortgages of people who are delinquent, in default or at risk of foreclosure–many of whom bought more than they could afford–and doing squat to help those who are still making payments, but would be helped tremendously if they could renegotiate payment terms as a result of job loss, diminished income or other financial hardship.

The person who plays by the rules, even at great sacrifice, gets screwed.

Don’t you just love America??

redfoxbluestate on January 13, 2009 at 11:29 AM

These are the kind of things that I think Atlas Shrugged highlighted well (but only in parts one and two–part three is just an apocalyptic rant promoting an upside-down version of Marxism/Leninism with John Gault as the second coming).

I’m reminded of a conversation between Dagny and her brother in that book, where the brother remarks that he turns a better profit by sending empty trains on wild goose chases through government subsidies than she does through sending full trains on honest business to turn a legitimate profit.

And I rather liked part 3. Without it, one never understands that Rand was not trying to promote a political party or a business model, but trying to portray Objectivism as a single, continuous basis of thought, action, and rationale. Regardless of how genuinely applicable it is in the real world. But that’s what she meant about Romantic Realism.

Spc Steve on January 13, 2009 at 11:36 AM

The person who plays by the rules, even at great sacrifice, gets screwed.

Don’t you just love America??

redfoxbluestate on January 13, 2009 at 11:29 AM

It’s changed form equal opportunity to equal result. However bad you do you deserve the same.

the_nile on January 13, 2009 at 11:36 AM

It’s changed form equal opportunity to equal result. However bad you do you deserve the same.

the_nile on January 13, 2009 at 11:36 AM

Totally agree. But I guess this is in line with Obama’s concept of “fairness.” Shouldn’t we all have the same things regardless of the effort–or lack thereof–we expend to get it? Makes me ill.

redfoxbluestate on January 13, 2009 at 11:39 AM

It’s changed form equal opportunity to equal result. However bad you do you deserve the same.

Democrats campaigned for the loser vote and they got it.

Unfortunately, only winners pay taxes now.

What will the Democrats do when the winners run out?

We can’t live on liquor taxes paid by the Kennedy clan.

NoDonkey on January 13, 2009 at 11:41 AM

I wish I could buy Ford stock. I already buy their cars.

Cindy Munford on January 13, 2009 at 11:43 AM

If they would just add text to these bailout bills that says, in effect,
“If these bailout measures fail (goals and benchmarks written in the bill), then the members of Congress who voted for it must immediately resign their Congressional seats and face possible criminal charges for fraud and abuse of taxpayers money”…

Congress is calling for more accounting of the bailout money, how about more accounting of the actions of Congress?

albill on January 13, 2009 at 11:47 AM

A good time to have bought Ford stock would have been mid-late November when it was $1.50. Hopefully, the company does as best that they can and the stock goes back up. Not long ago, just a few 6 months or so, it held steady in the $9 a share range. ($32 a share in 1998)

wise_man on January 13, 2009 at 11:50 AM

Normally I am 100% against government intervention and support of businesses, but if a company like Chrysler, which had undertaken a major restructuring, gets killed because of bad government policy (bad mortgages and a banking/lending collapse) then I try to keep an open mind. Losing Chrysler would cost a lot of jobs and the best looking American made cars. (Yes I own one, a 2001 PT Cruiser that has given me zero problems.) And if they do make it through this year, they are poised with 5 electric vehicles in the pipeline, especially the 200C the introduced at the Detroit auto show.

Sheerq on January 13, 2009 at 11:55 AM

Both of my vehicles are Fords. They have been reliable. I was considering purchasing a Honda again but I think my next purchase is going to reward Ford for this effort.

WE GOT TO STICK TOGETHA!

Now if we could just get government out of the way.

shick on January 13, 2009 at 11:58 AM

Congress is calling for more accounting of the bailout money, how about more accounting of the actions of Congress?

We mortals have no standing when it comes to questioning the towering gods of the Democrat Party, who take care of us like a mother cub looks after her cublings.

I mean, is there a more perfect being in this world than Barney Frank?

He’s infallible and omniscient.

NoDonkey on January 13, 2009 at 11:59 AM

Now if we could just get government out of the way.

shick on January 13, 2009 at 11:58 AM

…and get rid of the commie labor unions.

Speaking of labor unions. Did anyone see Madagascar 2? The penguins referred to the Monkeys as “commie unions”. I laughed really loud in the theater. My kids looked at me funny.

shick on January 13, 2009 at 12:02 PM

I bought a Ford in December, and talked my folks into doing the same. I hope people are paying attention. As with most government programs, failure is rewarded and success is punished.

Vashta.Nerada on January 13, 2009 at 12:08 PM

I’ve lost TWO contracts in the last month.

I’ve had Two more potential contracts cancelled (even after posting, they are no longer taking any bids…).

Two were due to changes in the Government, and no one knowing which way Bambi will jump, or how new appointees will impact ongoing projects.

Other Two from financial instiutions who are not proceeding with planned hardware/software upgrades, because they have no idea of how the Gov is going to impact their business climate… by choosing winners and losers.

End result? I’ve just finished a meeting with my employees, telling them that unless a contract comes up in the next 2 weeks, we are going to have to go out of business.

Where the F is my bailout?

Romeo13 on January 13, 2009 at 12:12 PM

Did anyone notice the hydrogen powered Ford in Quantam of Solace? Hydrogen power is efficient clean, but lacks infrastructure, chiefly, hydrogen. California could make a comeback if it allows nuclear plants that can produce hydrogen off peak hours. This would give Ford a huge advantage versus the GM and Chrysler.

I do not think that government interference will hurt Ford. Ford’s independence will hurt GM and Chrysler. GM will have to continually comeback for more cash. They have forwarded years of car sales by selling them with 5, 6, qnd 7 years loans. With a 30% downturn in the industry overall there is no way they can survive without being subsidized. This gives Ford even better marketing. Do you buy the socialist dependent GM or do you buy the American independent Ford?

Theworldisnotenough on January 13, 2009 at 12:22 PM

If anyone doubts what happens when one throws more money with wild abandon at mediocrity while thinking that will solve the problem…. they probably haven’t noticed our publik skools.

viking01 on January 13, 2009 at 12:24 PM

These are the kind of things that I think Atlas Shrugged highlighted well (but only in parts one and two–part three is just an apocalyptic rant promoting an upside-down version of Marxism/Leninism with John Gault as the second coming).

Tend to agree with that. I found that Heinlein’s “Starship Troopers” is the perfect companion piece to Atlas Shrugged.

JiangxiDad on January 13, 2009 at 12:26 PM

A lifelong friend of mine is a union local veep (not going to tell which one). Even he admits the UAW is unreasonable and damaging, and has outlived its reason for existing!

stonemeister on January 13, 2009 at 12:29 PM

Japan had a huge problem “zombie” corporations in the 90′s. Everything we are trying now has already been a demonstrable failure in the 2nd largest economy in the world.

I did a google search and came up with this link from 2005:

http://ddo.typepad.com/ddo/2005/07/japanstyle_zomb.html

It’s sad that despite the evidence to the contrary, they spend the money anyway.

Asher on January 13, 2009 at 12:36 PM

I hope Ford launches a marketing campaign that illustrates that they are standing on their own .. four wheels .. and trying to make it on their own .. which most Americans truly respect and I think would give them a hand up. But I don’t think most Americans know they are not in Washington with their hand out since the MSM keeps referring to the Big 3 Bailout. I’ve even had to point it out on several occasions here that Ford is not getting the loan that the GM and Chrysler are getting.

Texas Gal on January 13, 2009 at 12:49 PM

Instead of picking winners and losers, and of burdening manufacturers and other markets with social-political engineering like CAFE standards, Congress should butt out and let private enterprise fend for itself.

As you pointed out in a previous post, Ed, we haven’t learned, with SUV sales rising yet again. Those SUVs would be burning a lot more fuel without CAFE [only the largest SUVs are, due to gross vehicle weight, exempt from CAFE].

One way to affect the supply/demand curve is to reduce demand. CAFE and EISA are neutral, because they affect foreign and domestic car builders identically, and they have statistically reduced demand about 15%, thus decreasing each of our gasoline bills by about the same amount, as well as putting pressure on Iran and Russia to slow down or halt development of new strategic weapons due to softened demand in the fuel markets.

unclesmrgol on January 13, 2009 at 12:51 PM

Tend to agree with that. I found that Heinlein’s “Starship Troopers” is the perfect companion piece to Atlas Shrugged.

JiangxiDad on January 13, 2009 at 12:26 PM

I read “Starship Troopers” too.
By “companion”, do mean a continuation, a rebuttal, or both?

Count to 10 on January 13, 2009 at 12:52 PM

JiangxiDad on January 13, 2009 at 12:26 PM

Of course, what I really mean by that last part is a) the story line only makes sense to me if Galt is God, with the ability to alter reality to what he thinks it should be, and b) there is a sequence of betray-by-a-kiss, tempted-by-the-devil, exorcism, and torture-on-a-cross (all metaphorically speaking) that look like allusions to the new testament.

Count to 10 on January 13, 2009 at 12:57 PM

BizWeek isn’t the first to note this; the WSJ editorialized it two weeks ago.

The messy little policy issue is that these GM products compete with those sold by Ford, Toyota, Honda and numerous other car makers that won’t benefit from GMAC’s cash infusion. And with the cost of financing often crucial to buyer decisions, the feds have now put the muscle of the state behind one company’s products.

…This is always what happens when politicians decide to muck around in private industry. Even when made with the best intentions, their policy decisions have unintended consequences that help some companies at the expense of others.

But as this blog noted in response:

First, Chrysler is owned by Cerberus Capital Management, a private equity investment firm which also has a majority stake in GMAC Financial Services (which is now becoming a bank holding company). Making cars isn’t their primary business. Ford, however, is first and foremost a car company that, well, sells cars, and has been more successful selling its product than the other Detroit automakers. Make of that what you will.

Second, it’s far from clear that GM’s zero-percent financing will do much for business. It didn’t do a lot for them previously, and not moving product is a big reason why GM’s in the taxpayer-bailout boat. Is this a case of throwing more money at an intractable problem?

Paul_in_NJ on January 13, 2009 at 1:08 PM

Ed’s analysis sounds good, unless you are a socialist and think it’s better for government to destroy the economy by interfering in the markets. That way, your power is absolute.

Like Barney Franks and Obama.

notagool on January 13, 2009 at 1:22 PM

New bumperstickers:
FORD=Built by capitalism
GM&Chrysler=built by socialism

or

Support Capitalism
Buy a Ford

shick on January 13, 2009 at 2:03 PM

Support Capitalism
Buy a Ford

UAW workers have nothing to do with the free market.

Let Ford, Chrysler and GM die along with the UAW, I’m not buying a thing these union jackasses shoddily throw together as long as I have a choice.

NoDonkey on January 13, 2009 at 2:07 PM

It’s worse then that… Dodd & Frank are back:

In December, GMAC got $5 billion from the government’s $17.9 billion bailout of the domestic auto industry, which Sen. Dodd supported, and immediately lowered its lending standards. No longer would buyers need a credit rating of 700 or higher. Now, people qualify with scores as low as 621, which is 2 points above “poor” and 102 points below America’s median. As columnist George Will put it, GMAC is using taxpayers’ dollars (more accurately, money borrowed against tax receipts far into the future) to issue subprime loans.

DANEgerus on January 13, 2009 at 2:56 PM

Can we apply this to states too? I can’t be the only one unhappy with the idea of using federal money to bail out that disaster California.

Bishop on January 13, 2009 at 11:13 AM

And cities also; especially cities.

Johan Klaus on January 13, 2009 at 2:59 PM

I can’t be the only one unhappy with the idea of using federal money to bail out that disaster California.

Since most of its inhabitants are either Mexicans or liberal Democrats, how about selling it back to Mexico.

I’d settle for a couple of cases of Dos X’s and a free taco for every citizen of the other 49.

‘cept Massachusetts. They can eat Barney Frank.

NoDonkey on January 13, 2009 at 3:04 PM

Since most of its inhabitants are either Mexicans or liberal Democrats, how about selling it back to Mexico.

I’d settle for a couple of cases of Dos X’s and a free taco for every citizen of the other 49.

‘cept Massachusetts. They can eat Barney Frank.

NoDonkey on January 13, 2009 at 3:04 PM

San Diego is an important Navy port, and the central valley and Mountains are nice places. It is LA and SF that screw the place up. California would be a red state if you just cut off the shoreline.

Count to 10 on January 13, 2009 at 3:20 PM

The government has been hurting ‘good businesses’ in the Airline Industry for ages. Southwest has been managed very well and actually makes money, yet they have to compete with the big bankrupt airlines, without the benefit of government protections, loan guarantees, etc…. And when the industry as a whole is sinking, it brings everybody down. Trust me, I know. My husband had to exercise some stock options a while back and we practically lost money on them. Some of these dinosaurs need to become extinct already. But of course, the government will step in and save them, to the detriment of the healthy.

pannw on January 13, 2009 at 3:25 PM

San Diego is an important Navy port, and the central valley and Mountains are nice places. It is LA and SF that screw the place up. California would be a red state if you just cut off the shoreline.

But isn’t San Diego on the shoreline?

We could move the ships to Oregon, um wait, or Washington State, ugh, that’s not good either.

How about we rent the port in San Diego and pay whatever hombre is HMFIC down there $1 a year, like we do for GITMO?

NoDonkey on January 13, 2009 at 3:25 PM

Kevin in Southern Illinois on January 13, 2009 at 6:51 PM

Meanwhile, the UAW is home jerking off, drinking bad beer and practicing union slogans.

Until the UAW is gone, never again will I even think about buying a Ford, GM or Chrysler.

NoDonkey on January 13, 2009 at 8:58 PM

Tend to agree with that. I found that Heinlein’s “Starship Troopers” is the perfect companion piece to Atlas Shrugged.

JiangxiDad on January 13, 2009 at 12:26 PM

I figure Rand and Heinlein have interesting chess games over coffee in the afterlife.

sven10077 on January 13, 2009 at 10:22 PM

I read “Starship Troopers” too.
By “companion”, do mean a continuation, a rebuttal, or both?

Count to 10 on January 13, 2009 at 12:52 PM

it is an argument, not that it is a direct one, on the nature of patriotism and service….

I love Ayn and may well go on strike the next four years, but my military family is more Robert oriented in political thought.

sven10077 on January 13, 2009 at 10:25 PM

Meanwhile, the UAW is home jerking off, drinking bad beer and practicing union slogans.

Until the UAW is gone, never again will I even think about buying a Ford, GM or Chrysler.

NoDonkey on January 13, 2009 at 8:58 PM

There’s a bad car story buried here somewhere. I can just feel it…

unclesmrgol on January 14, 2009 at 1:26 AM