To B or Not To B

High on everyone’s minds these days is the question of whether or not the government should bailout (the "B" in the title of this piece) the big three US auto-manufacturers. Everyone has some sort of an opinion, and arguments have been put forth from both sides of the aisles as to what is good and what is necessary and what is fair.

It amazes me that some opinion leaders would summarily dismiss bailing out the automakers without offering any alternative suggestions at all; opting to cling to the purest capitalistic dogmas (let them fail and go into bankruptcy) and ignoring the social responsibility that we have towards one another, especially in such difficult times.

Without a doubt, a bailout composed purely of injecting cash into the US auto-manufacturers will not work other than as a temporary fix to stem the bleeding. The single biggest factor behind the current crisis they are facing is the sharp drop in demand for new automobiles. This is evidenced by an escalating number of new vehicles sitting in inventory - you can see the gleaming new vehicles in the ports and in the parking lots of automakers - and the dismal sales numbers reported by all auto manufacturers, including the foreign owned ones. We don't hear of the foreign automakers going to Congress for a bailout only because they are foreign owned, not because they are not hurting, probably just as badly.

The decline in demand stems from problems we are experiencing around the country where significant job cuts are being announced almost on a daily basis. Until there is a turnaround in the economy and the spate of bad news and worrisome layoffs ends, the auto industry has little hope of surviving (even if it were to enter into an orderly bankruptcy) if help is not forthcoming. The danger that we face as a nation is that the livelihood of countless numbers of families that are tied to the auto industry directly and indirectly will be lost.

While cost cuts can be achieved through restructuring, stimulating demand for new cars in a drawn out economic recession is a whole different ball game. Consumers who would be in the market for a new car under normal circumstances will, in these uncertain times, defer the purchase till they see some silver lining on the economic horizon. Further complicating the problem is the hesitation of banks and financial institutions to provide credit or to lend money – consumers needing a new vehicle are hamstrung by the new and higher credit score requirements they need to show in order to get a loan.

Even with the proposed bailout money, production will have to be cut significantly till the excess inventory of unsold cars is absorbed by a recovery in demand and, like it or not, further production cuts will mean more lost jobs.

A better option may be for the government to issue vouchers to subsidize the purchase of vehicles – with conditions attached of course, including for example, a requirement that the new vehicles must be manufactured in the US and must meet certain gas-mileage standards. If the subsidy is attractive enough, there will be a renewed demand and the industry will have the breathing room they need to retool and renegotiate costs to be more competitive.

Divide the proposed bailout of $14 billion by whatever makes sense as the subsidy value of each voucher and you get the answer to how many new, US made vehicles that can be sold as a result of the stimulus. Just as an example, at $5,000 per voucher, it could generate a demand for 2.8 million new vehicle sales. Using the rule of thumb that a new vehicle loses 20% in value the minute it leaves the car dealer’s lot, the subsidy should be capped at 20% of the price of the vehicle so that any temptation to abuse the system by using the vouchers to buy new vehicles and reselling them at a profit is eliminated.

With the assurance of a resurgence in demand for new vehicles, banks and financial institutions that are currently hesitant to lend to the US auto-manufacturers will be more willing to step back into their role as lenders.

The vouchers would also benefit consumers as they will need less credit to complete the purchase and the risk exposure for the lending institutions will be equally reduced as a result. Of course, not all taxpayers will be able to benefit from the vouchers unless they are in the market for a new vehicle and are prepared to pay for the remaining price of the vehicle that the vouchers do not cover. In the broader picture, everyone will benefit from the fact that more people remain employed and they, in turn, will consume goods and services that will keep more people employed. We are all inter-connected – what goes around comes around.

Part of the cost of the vouchers can be borne by the auto-manufacturers and dealers themselves – they already are offering the kitchen sink to lure potential buyers into their showrooms. They have nothing to lose by participating in a scheme designed to keep them afloat.

Until the new administration can start to put into place whatever package they have planned to stimulate job growth and spending, it is hard to see how else the auto-industry can recover. The vouchers are effectively still a bailout but a more palatable one, helping not just the US auto-manufacturers but taxpayers who are prepared fork out the money to buy a new vehicle.

It is time to think ‘outside-of-the-box’ and to come up with more intelligent solutions.

Challenging? Yes. Impossible? No.

This is America. This is the land of ideas and creative thinking.