Why the bailout will kill good business

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.