General Motors Should be allowed to Fail

General Motors who already took USD13,400,000,000 in loans from the US Government are believed to be looking for another loan, this time of USD22,600,000,000. This would be on top of handouts from various other Governments across the world; for example the Australian Government gave GM AU$149,000,000, ostensibly to make a 'green car' (it wasn't specified whether or not GM'd be given more money to make it in other colours) and according to a GM website (link) GM are looking to Europe for a futher EUR3,300,000,000 .

This is a bad deal for taxpayers on many levels.

Firstly, General Motors are far from being the best car makers out there. They have been losing market share for years, according to Forbes for example (link) since 1980 their share of the US market has fallen from 46% to less than a quarter. The reason? Their products don't represent as good value to consumers as those made by their competitors. If you make bad products that your potential customers don't like then you go bust in favour of those that make better ones. That's capitalism.

Secondly, General Motors employed 266,000 people in the US as at the end of 2007 (link). The loans totalling USD36,000,000,000 work out to be a little over USD135,000 per employee. If even a fraction of that money was made available to small companies who either have had funding withdrawn by banks or to entrepreneurs with great ideas a lot more could be done with a lot less. There would also be less risk attached to lending the money more widely as some would fail and some would succeed. With GM, the US taxpayer will most likely either get all or nothing back. My guess is that the latter would be the outcome.

Now of course there are the workers who are indirectly employed by GM, for example the people who work for supplier and associated companies. These are estimated to number about 650,000 people. Lots of these people will lose their jobs if GM is allowed to fail. However most will get jobs with rival companies, jobs that will quite probably be more secure as the competitor companies are much better run and not in imminent danger of going bust!

Thirdly, General Motors has been badly managed for many years. To keep the unions happy at minimum current cost, the management kept promising employees greater and greater benefits upon retirement - ever more generous retirement terms and health care schemes. These benefits are now the equivalent of USD1,600 per car (link) or to put it another way, while workers at other companies make $40 or $50 per hour, it costs GM $70 per hour if you include legacy costs. This makes it impossible for GM ever to hope to compete with its rivals. Add to this the fact that they have so many interlocking brands that they end up competing with themselves (basically the same minivan is sold under four different brands for example).

Worst of all, GM has now gone cash flow negative - in other words, it costs GM more money to make cars than it makes from selling cars, clearly an untenable position for the company to be in.

The problems at GM are so severe that the US Government is going to be forced to let them fail at some point. They are beyond turning around. If this happens, the factories and skills of their workers won't be destroyed. Let other, more able people use the skills and assets of this once great company to make great cars at a decent price again.