Posted by: Kaushik | December 9, 2008

why the auto bailout shouldn’t take place

Recent news reports have indicated that the US government is inclined towards giving the Big 3 of Detroit a bailout to the tunes of billions of dollars. While the initial details are rather hazy, it would involve the US government taking stakes in the companies. At the moment, Chrysler and GM require a bailout more than Ford which needs an extension of it’s line of credit.

Is there a precedent for such an action? Lee Iacocca went begging to the government in the late 70’s and secured some government aid. But, every loan was repaid by 1983 and the government had actually recouped a $350 million profit on it’s investment.

While, admittedly times are rather hard and the US consumers who in the past would resurrect the economy with their spending have decided to watch every penny. They’ve been rather conservative when it comes to spending on the big ticket items. Auto sales were down 20% in August and have been posting double digit declines for a while now.

But, the auto industry is in it’s current predicament because of it’s failure to deal with the changing times. While the current recessionary environment may have hastened it’s decline, the cracks persisted a while ago. For long, the Big 3 were busy promoting gas guzzling SUV’s and as the price of gasoline rose over the years, the appetite for the SUV began to wear thin. Furthermore, the failure to develop hybrids or other fuel efficient cars has ensured that the competition developed at their expense.

If memory serves me right, it was the Americans who threatened to impose billions of dollars of tariffs on the Japanese auto industry in the 1980’s to ward off the Japanese government intervention in the auto industry in Japan. But then the wheel has come around a full circle.

A bailout shouldn’t be awarded to mismanagement of companies and a failure to innovate to stay ahead.

But then again, only if wishes were horses..

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